Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. The price level
is , and the velocity of money is . Suppose that velocity is constant and the economy’s output of goods and services rises by 5 percent each year. Use this information to answer the questions that follow. If the Fed keeps the money supply constant, the price level will , and nominal GDP will . If the Fed wants to keep the price level stable instead, it should next year. If the Fed wants an inflation rate of 10 percent instead, it should . (Hint: The quantity equation can be rewritten as the following percentage change formula:
1 answer:
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Answer:
a. increase price in the short run but not in the long run.
Explanation:
A perfectly competitive market is one in which firms in an economy produce similar goods, and use resources that are limited in quantity.
An increase in demand will result in a corresponding increase in price, and results in firms making high profits. In the diagram below it results in a shift of demand from D1 to D2.
In the long run as firms have low barrier to entry more firms enter the market and supply shifts from S1 to S2. There is reduction in prices and profits start to fall. This is illustrated in the second diagram.
