# Answer to Question #4536 in Finance for Ronnica Y

Question #4536

The One Product economy, which produces and sells only

personal computers (PCs), expects that it can sell 500 more, or 12,500

PCs, next year. Nominal GDP was $20 million this year, and the

money supply was $7 million. The central bank for the One Product

economy plans to increase the money supply by 10 percent next year.

a. What was the average selling price for the personal computers

this year?

b. What is the expected average selling price next year for

personal computers if the velocity of money remains at this

year’s turnover rate? What percentage change in price level is

expected to occur?

c. If the objective is to keep the price level the same next year

(i.e., no inflation), what percentage increase in the money

supply should the central bank plan for?

d. How would your answer in (c) change if the velocity of money

is expected to be three times next year? What is it now?

personal computers (PCs), expects that it can sell 500 more, or 12,500

PCs, next year. Nominal GDP was $20 million this year, and the

money supply was $7 million. The central bank for the One Product

economy plans to increase the money supply by 10 percent next year.

a. What was the average selling price for the personal computers

this year?

b. What is the expected average selling price next year for

personal computers if the velocity of money remains at this

year’s turnover rate? What percentage change in price level is

expected to occur?

c. If the objective is to keep the price level the same next year

(i.e., no inflation), what percentage increase in the money

supply should the central bank plan for?

d. How would your answer in (c) change if the velocity of money

is expected to be three times next year? What is it now?

Expert's answer

a. P = GDP/Q = $20m/12,000 = $1,666.67

b. Velocity (V) was GDP/M = 20m/7m =

2.86, M will be 7m*1.1 = $7.7m, GDP = 7.7*2.86 = $22m, P = 22m/12,500 =

$1,760

%change = (1,760 - 1,666.67)/1,666.67 = 5.6%

c. M = P*Q/V =

1,666.67*12,500/2.86 = $7.28m, % = (7.28 - 7)/7 = 4%

d. M = P*Q/V =

1,666.67*12,500/(2.86*3) = $2.43m, % = (2.43 - 7)/7 = -65%

b. Velocity (V) was GDP/M = 20m/7m =

2.86, M will be 7m*1.1 = $7.7m, GDP = 7.7*2.86 = $22m, P = 22m/12,500 =

$1,760

%change = (1,760 - 1,666.67)/1,666.67 = 5.6%

c. M = P*Q/V =

1,666.67*12,500/2.86 = $7.28m, % = (7.28 - 7)/7 = 4%

d. M = P*Q/V =

1,666.67*12,500/(2.86*3) = $2.43m, % = (2.43 - 7)/7 = -65%

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