The Velocity of Money in the Small Republic of Sloagia

question 104

Essay

The velocity of money in the small Republic of Sloagia is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion.
a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate.
b) Calculate the inflation rate using the formula ÄM/M + ÄV/V = ÄP/P + ÄY/Y, where the Greek letter Ä represents a change and the ratio ÄM/M × 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part
a. Why could there be some difference?

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