Question

A. By how much does the supply of money supply or contract?

Supply of money increases by $20 million

b. Bankers estimate the velocity of money to be 2.4 and that the price level will increase from 100 to 102. What will be the impact of part d on the quantity of goods and services in the economy given an initial money supply of $4 billion?

Answer 1

If the central bank increases the money supply by $100 billion and the velocity of money is 3, the nominal GDP will expand by $300 billion.

Step-by-step explanation:

According to the quantity equation of money, nominal GDP is equal to the money supply (M) multiplied by the velocity of money (V) and the price level (P). Given that the money supply increases by $100 billion and the velocity of money is 3, we can calculate the impact on nominal GDP:

1. Nominal GDP = $100 billion * 3 * 1 (since the price level is not changing)
2. Nominal GDP = $300 billion

Therefore, the nominal GDP will expand by $300 billion if the central bank increases the money supply by $100 billion and the velocity of money is 3.