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Chapter 20: Q 21. (page 548)

Suppose the money supply Mhas been growing at 10%per year, and nominal GDP, PY, has been growing at 20%per year. The data are as follows (in billions of dollars):

Calculate the velocity for each year. At what rate is the velocity growing?

Short Answer

Expert verified

Velocities are equal to 10,11,12in years 2018,2019,2020respectively.

Velocity is growing at the rate of10%.

Step by step solution

01

Step 1. Define velocity.

A velocity of an item is a function of frequency and is defined as the rate of growth of its location with respect to the criteria of reference.

02

Step 2. 

Use the formula: V=PYM

For year 2018:

width="74">V=1000100=10

For year width="42">2019:

V=1200110鈮�11

For year 2020:

V=1440121鈮�12

Rate of change in velocity width="119">=11-1010脳100

=10%

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the Federal Reserve (FDHBFRBN). Convert the two 鈥渄ebt held鈥� series to 鈥淎nnual鈥� using the frequency setting. Download all three series into a spreadsheet. Make sure that the rows of data align properly to the correct dates. Note that for the deficit series, a negative number indicates a deficit; multiply the series by 鈥�1 so that a deficit is indicated by a positive number. Manipulate the three series so that all data are given in terms of the same units (either millions or billions of dollars). To do this, if a series is in millions and you are converting it to billions, divide the series by 1,000. Finally, for each year, convert the two 鈥渄ebt held鈥� series into one 鈥渃hanges in debt holdings by the public and the Federal Reserve鈥� series by calculating, for each year, the difference in bond holdings from the preceding year.

a. Create a scatter plot showing the deficit on the horizontal axis and the change in bond holdings by the public on the vertical axis, using the data from 1980 through the most recent period of data available. Insert a fitted line into the scatter plot, and comment on the relationship between the deficit and the change in public bond holdings.

b. Create a scatter plot showing the deficit on the horizontal axis and the change in bond holdings by the Federal Reserve on the vertical axis, using the data from 1980 through the most recent period of data available. Insert a fitted line into the scatter plot, and comment on the relationship between the deficit and the change in Federal Reserve bond holdings.

c. Now repeat part (b), but create separate scatterplots for the period of 1980 to 2007, and 2008 to the most recent year. Comment on how, if at all, the monetizing of the debt is exhibited in the data. Do you think the relationship between the deficit and the change in bond holdings of the Federal Reserve has changed since 2008? Why or why not?

鈥淚f nominal GDP rises, velocity must rise.鈥� Is this statement true, false, or uncertain? Explain your answer.

How would you expect velocity to typically behave over the course of the business cycle?

According to the portfolio theories of money demand, what are the four factors that determine money demand? What changes in these factors can increase the demand for money?

Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade had been relatively high and quite unpredictable. Explain how this new inflationary environment would affect the demand for money according to portfolio theories of money demand. What would happen if the government decided to issue inflation-protected securities?
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