Question

Suppose over some period of time the money supply tripled, velocity fell by haif, and real GDP doubled. According to the quantity equation the price level is now Select one:

a.1.5 times its old value.
b. 6 times its old value.
c. 3 times its old value.
d.0.75 times its old value.

Answer 1

After applying the changes to the quantity equation of money (Money Supply x Velocity = Nominal GDP = Price Level x Real GDP), we find that the new price level must be 1.5 times its original value to satisfy the equation.

Step-by-step explanation:

According to the quantity equation of money, which is the formula Money Supply x Velocity = Nominal GDP = Price Level x Real GDP, we can understand the relationship between these variables. To find the new price level, we can plug the changes into the equation: if the money supply tripled, the velocity fell by half, and real GDP doubled, the new price level is calculated as follows:

Initial: M x V = P x Y

After changes: (3M) x (0.5V) = P' x (2Y)

Simplifying this, we get (1.5M) x V = P' x (2Y). Dividing the right side by 2, we get (1.5M) x V = P' x Y. This means that the new price level (P') is 1.5 times the original price level (P). Thus, the correct answer is a. 1.5 times its old value.