Question

Assume the money supply is $200, the velocity of money is 9, and the price level is $8. Using the quantity theory of money:a. Determine the level of real output.b. Determine the level of nominal output.c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent?Nominal output would be $______ , and real output would be $______.d. If the government established price controls and also raised the money supply 40 percent, what would happen?A.The equation of exchange wouldn't hold.B. Shortages would result in a perfectly competitive economy.C. Real output will increase in a monopolistic economy.D. The velocity of money might decrease.

Answer 1

a. $225

b. $1,800

c. $2,160

d. Option D

Step-by-step explanation:

The money supply is $200.

The velocity of money is 9.

The price level is $8.

a. According to the equation of exchange,

MV = PY

`\$ 200*9 = \$ 8* Y`

Y =
`(1800)/(8)`

Y = $225

b. Nominal output = MV

MV =
`\$ 200*9`

MV = $1,800

c. If the money supply increases 20% ,

New money supply

= $200 + 20% of 200

= $240

Nominal output

= MV

=
`\$ 240*9`

= $2,160

Real output

= $225

d. If the money supply is increased by 40%, but the government imposes price restrictions as well, this is likely to decrease the velocity of money as the price restrictions will create shortage in the market. The output level will not be able to increase.