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Consider the following table.YearQuantity of Money (billions of $)VelocityReal GDP (billions of 2012 $)GDP Deflator2006$1,36610.253$15,338 2009$1,6928.687  0.9532012$2,4616.719$16,197 If velocity had remained at the 2006 level, what would the GDP deflator have been in 2009 and 2012, assuming real GDP and money are as in the table? (Round your answers to 3 decimal points.)Deflator in 2009 =  Deflator in 2012 =

Question

Consider the following table.YearQuantity of Money (billions of )VelocityRealGDP(billionsof2012)VelocityReal GDP (billions of 2012 )GDP Deflator20061,36610.2531,36610.25315,338 20091,6928.687 0.95320121,6928.687  0.95320122,4616.719$16,197 If velocity had remained at the 2006 level, what would the GDP deflator have been in 2009 and 2012, assuming real GDP and money are as in the table? (Round your answers to 3 decimal points.)Deflator in 2009 =  Deflator in 2012 =

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Solution

To answer this question, we need to use the equation of exchange, which is MV = PY.

Here, M = Quantity of Money V = Velocity of Money P = Price Level (GDP Deflator) Y = Real GDP

We are asked to find the GDP deflator (P) for the years 2009 and 2012, assuming that the velocity of money (V) remained at the 2006 level.

  1. For 2009:

We rearrange the equation to solve for P: P = MV/Y

Substituting the given values:

P = (1,692billion∗10.253)/1,692 billion * 10.253) / 15,338 billion

Calculate the above expression to get the value of P for 2009.

  1. For 2012:

Again, we rearrange the equation to solve for P: P = MV/Y

Substituting the given values:

P = (2,461billion∗10.253)/2,461 billion * 10.253) / 16,197 billion

Calculate the above expression to get the value of P for 2012.

Remember to round your answers to 3 decimal points.

This problem has been solved

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