Suppose that in year 2008, the money supply is $400 billion, nominal GDP is 9 trillion, and real GDP is $4 trillion.
(a) What is the price level? What is the velocity of money?
(b) Suppose the velocity is constant and the economy's output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?
(c) What money supply should the Fed set in year 2009 if it wants to keep the price level stable?