Answer the following questions for a hypothetical economy whose situation in year 1 was as follows: M = $800 billion; long-term annual growth of real GDP = 3%; V = 4.
The banking system has no excess reserves and the reserve requirement is 10%.
Assume that V is constant and the economy is at full employment.
(a) What is the nominal GDP in year 1?
(b)If the Federal Reserve adheres to the monetarist rule of increasing the money supply by a constant 5% using open-market operations, explain whether it will have to buy or sell bonds and by how much between years 1 and 2 in order to meet the rule.
(c) Based on the information given above and calculated in (b) above, what will be the nominal GDP in year 2?
(d)Is this change greater or less than the change in real GDP? Explain.