Question

In: Economics

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

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)

Expert Solution

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%.

Rahul Sunny answered 2 years ago

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