Questions: Consider the economy of the planet of Navarro for the following questions. Suppose money supply for the economy is 1 million imperial credits, nominal GDP is 10 million imperial credits, and real GDP is 5 million imperial credits for the current year. Also, tax rate for Navarro is 20%. 1. Calculate the price level and the velocity of money for Navarro for the current year. - Price Level: Nominal GDP / Real GDP → 10 million imperial credits / 5 million imperial credits = 2 - Velocity of Money: Nominal GDP / Money Supply → 10 million imperial credits / 1 million imperial credits = 10 2. Suppose velocity stays constant (at the level you found in question 1) and the economy of Navarro grows in real terms by 5% next year. What will happen to nominal GDP and the price level if the central bank in Navarro keeps the

To answer the questions about the economy of Navarro, let's break down the information and calculations step by step.

Price Level: The price level can be calculated using the formula: \[ \text{Price Level} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \]

Given:

• Nominal GDP = \$10 million imperial credits
• Real GDP = \$5 million imperial credits

\[ \text{Price Level} = \frac{10 \text{ million imperial credits}}{5 \text{ million imperial credits}} = 2 \]

Velocity of Money: The velocity of money can be calculated using the formula: \[ \text{Velocity of Money} = \frac{\text{Nominal GDP}}{\text{Money Supply}} \]

Given:

• Nominal GDP = \$10 million imperial credits
• Money Supply = \$1 million imperial credits

\[ \text{Velocity of Money} = \frac{10 \text{ million imperial credits}}{1 \text{ million imperial credits}} = 10 \]

Real GDP Growth: Real GDP is expected to grow by 5%. Therefore, the new Real GDP will be: \[ \text{New Real GDP} = \text{Current Real GDP} \times (1 + \text{Growth Rate}) \] \[ \text{New Real GDP} = 5 \text{ million imperial credits} \times (1 + 0.05) = 5 \text{ million imperial credits} \times 1.05 = 5.25 \text{ million imperial credits} \]

Nominal GDP: Since the velocity of money is constant and the money supply remains the same, we can use the formula for the velocity of money to find the new Nominal GDP: \[ \text{Velocity of Money} = \frac{\text{Nominal GDP}}{\text{Money Supply}} \] Given that the velocity of money is 10 and the money supply is \$1 million imperial credits: \[ 10 = \frac{\text{Nominal GDP}}{1 \text{ million imperial credits}} \] \[ \text{Nominal GDP} = 10 \times 1 \text{ million imperial credits} = 10 \text{ million imperial credits} \]

However, since the real GDP has increased by 5%, the new Nominal GDP will be: \[ \text{New Nominal GDP} = \text{Velocity of Money} \times \text{New Real GDP} \] \[ \text{New Nominal GDP} = 10 \times 5.25 \text{ million imperial credits} = 52.5 \text{ million imperial credits} \]

Price Level: The new price level can be calculated using the formula: \[ \text{Price Level} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \] \[ \text{New Price Level} = \frac{52.5 \text{ million imperial credits}}{5.25 \text{ million imperial credits}} = 10 \]

1. Price Level (current year): 2
2. Velocity of Money (current year): 10
3. Next Year:
   • Nominal GDP: \$52.5 million imperial credits
   • Price Level: 10