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    Calculating rates of money supply, inflation and velocity.

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    Between 1984 and 1985, the money supply in the United States increased to $641.0 billion from $570.3 billion, while that of Brazil increased to 106.1 billion cruzados from 24.4 billion. Over the same period, the U.S. consumer price index rose to 100 from a level of 96.6, while the corresponding index for Brazil rose to 100 from a level of only 31. Calculate the 1984-1985 rates of money supply growth and inflation for the United States and Brazil, respectively.

    Note that the monetary value of output in 1985 was $4010 billion in the United States and 1418 billion cruzados in Brazil. Calculate the velocity for the two countries in 1985. Why do you think the velocity was so much higher in Brazil?

    The velocity of money, V, is defined as the ratio of real GNP to real money holdings, V=(M/P).

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    Solution Preview

    This question is simply about the definition of inflation and money supply.

    In part (a), by definition, inflation = (New CPI - Base Year CPI) / Base Year CPI
    Real money supply = Nominal money supply / CPI

    In part (b), we simply use the ...