Answer the questions( show your work or explain your reasoning).

  1. Suppose that in 2011 Mexico’s money supply is 2.5 trillion pesos and its nominal GDP is 15.0 trillion pesos.
    1. What is the income velocity of money in Mexico? (Give a numerical answer.)
    2. If Mexico’s money supply grew to 3.0 trillion pesos in 2012, what would the relevant theory predict to be the rate ofinflation between 2011 and 2012? (Assume Mexico’s real GDP and income velocity of money remain constant. Give anumerical answer.)
    3. If the real interest rate is 5%, what will the nominal interest rate be?
  2. You buy a government bond with a face value of $10,000 that matures in 1 year for $9,934.43 today.
    1. What is the yield on the bond? (Give a numerical answer.)
    2. If the inflation rate over the year is 1.4%, did your purchasing power increase or decrease over the year? Briefly explain.

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