Suppose the economy has the following values for money supply (M) and nominal GDP (PY) for the past three years 2012 201

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Suppose the economy has the following values for money supply
(M) and nominal GDP (PY) for the past three years
2012
2013
2013
M
500
550
605
PY
5000
6000
7200
(a) Calculate the rate at which money supply growing from each year
to the other (3marks)
(b) Calculate the rate at which nominal GDP is growing from each
year to the other (3marks)
(c) Calculate the velocity for each year (4.5 marks)
(d) Calculate the rate at which velocity is growing from each year
to the other (3 marks)
(e) predict (calculate) the values for 2014 under the following
different case
(i) What will be nominal GDP in 2014 if velocity was constant from
year 2013 to year 2014 and money supply increases by 50% (1.5
marks)
(ii) What will be nominal GDP if money supply grows at 20 % and
velocity declines by 30% (1.5 marks)
(iii) If velocity and aggregate output remains constant from year
2013 to 2014, what will be the inflation rate in 2014 if money
supply increases by 10%? (1.5 marks)
(f) Explain one factor that would reduce velocity and one factor
that would increase velocity. (3 marks)
(g) Why does Friedman’s view of the demand for money suggest that
velocity is predictable, and Keynes suggests the opposite? (3
marks)
(h) Why does Friedman think that money demand is unaffected by
changes in interest rates, but Keynes thought that it is affected
(3 marks)
(i) In Keynes’s analysis of the speculative demand for money, what
will happen to money demand (and why) if people suddenly decide
that the level of interest rate has gone above the normal level. (3
marks)