Question

The Monetary System and Policy Below represents the monetary system in the US: Small time deposits $1,100 billion Demand deposits and other checkable deposits $800 billion Savings deposits $1,350 billion Money market mutual funds $900 billion Traveler's checks $30 billion Large time deposits $750 billion Currency $150 billion Miscellaneous categories in M2 $40 billion 4. From the value of M2 you found in question 1, assume that the price level is 100 and real output is valued at $218.5 billion.

What is the current velocity of money? Velocity = (P x Y) /M 100 x $218.5 / $5,120 = 4.26 5.

Continuing from the previous question. The Federal Reserve is currently using the M2 money supply as a guide to help them in their policy goals. The Federal Reserve wants to promote a healthy economy. The Federal Reserve, in an attempt to improve the economy, injects $500 billion into the economy over the course of the year. During that same year, real output grew to $223.83 billion. Based on this, what is the new rate of inflation?

Answer 1

M1 money supply: a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.

M2 money supply: a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit.

M3 includes M2 plus large time deposits in banks.

Items Given In Question:

Small time deposits $1,100 billion

Demand deposits and other checkable deposits $800 billion

Savings deposits $1,350 billion

Money market mutual funds $900 billion

Traveler's checks $30 billion

Large time deposits $750 billion

Currency $150 billion

Miscellaneous categories in M2 $40 billion.

Hence, we include everything in M2 except large time deposit with bank.

M2 =$1,100 billion+$800 billion+$1,350 billion+$900 billion+$30 billion+$150 billion+$40 billion

M2=$4370 Billion

As MV=PY

Velocity = (P x Y) /M

V= 100 x $218.5Billion / $4370Billion

Velocity = 5

Fed injects $500 billion

New M2 = $4870Billion

New real output = $223.83 billion

As MV=PY

$4870Billion*5=$223.83 billion*P

24350/223.83 = P

108.78 = P

Hence Inflation increased by 8.78%