7.

Suppose we observed an economy in which changes in the money supply produce no changes
whatever in nominal GDP. What could we conclude about velocity?

From what I understood, the economy should have the money supply in addition to the velocity equals
the nominal GDP. Every time one changes, the other one should match it exactly. We know that velocity
in macroeconomics refers to how the money goes up as individuals pass it by between each other. A
constant value for velocity could have some implications. According to what the Authors say, “1.
Nominal GDP could change only if there were a change in the money supply. Other kinds of changes,
such as a change in government purchases or a change in investment, could have no effect on nominal
GDP. 2. A change in the money supply would always change nominal GDP, and by an equal percentage”
(Rittenberg, Tregarthen, 2012, p. 466).

3. Do you think the Fed should be given a clearer legislative mandate concerning macroeconomic goals?
If so, what should it be?

They do have their own goals which I think they are great. From What I understood is that they can be
an obstacle at times to the Fed. According to what the authors say, “A monetary policy that seeks to
reduce inflation may increase unemployment and weaken economic growth” (Rittenberg, Tregarthen,
2012, p. 437-438). They should only one legislative mandate that does not contradict with another one
like keep the interest rate “2% to 3%.”

8. Suppose price levels were falling 10% per day. How would this affect the demand for money? How
would it affect velocity? What can you conclude about the role of velocity during periods of rapid price
change?

It would be a disaster if price levels were falling with percent every day. As prices fall, the interest rate of
that price will rise more and more (Rittenberg, Tregarthen, 2012). Since the interest rates are higher, the
aggregate demand of money will shift to the left with the increase of interest rates. It will affect velocity
in the long run by as it will increase with the increase of money. Velocity can play a great role in price
changes. It keeps the same nominal GDP, but the but it will increase gradually with the increase of
money supply.

References

Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under Creative

Commons by-nc-sa 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0/)