Question

Consider an economy where the velocity of the monetary base is assumed constant but

nominal GDP grows 3 percent per annum. Is it possible for velocity to stay constant when

money growth increases?

3. Assume the Ghanaian economy, in a particular year, has the following numbers in billions

of Ghana Cedis:

GDP = 400

Government consumption = 100

Transfers from the government to the private sector = 80 Government investment = 12

Government net interest payment = 8

Government production = 40

Tax revenue = 180

a. Calculate the government use of goods and services as a share of GDP (in percent)

b. Calculate the government tax revenue as a share of GDP (in percent)

c. Calculate the government production as a share of GDP (in percent)

d. Calculate the deficit of the public sector (general government) as a share of GDP

(in percent)

Answer 1

The velocity of money is assumed to be constant and if nominal GDP grows 3% per annum then velocity of money is possible to stay constant when money growth increases. We know from the quantity theory MV = PY, if nominal GDP i.e PY grows at a 3% percent then V can be constant if M grows i.e money supply grows at 3%. So, we can say velocity of money is possible to constant when money growth increases.

a. Government use of goods and services = Government consumption+Transfer from government to private sector+government investment+government net interest payment+government production = 100+ 80+12+8+40 =240. Share of use of goods and services by government as a percentage of GDP is (240/400)*100 = 60%.

b. Share of tax revenue is as a percentage of GDP is =(Tax revenue/GDP)*100 = (180/400)*100 = 45%.

c. Government production as a share of GDP is = (Government production/GDP)*100 = (40/400)*100 = 10%.

d. Deficit of public sector is Government expenditure - Government revenue = 100 +80+12 +8 -180 = 20. Share of this as a percentage of GDP is (20/400)*100 =5%.