Question

What will happen if the price is increased from $10 to $20 by government fiat or producer monopoly?

a) Velocity will decrease from 2 to 1.
b) Quantity of money in circulation will increase from $50,000 to $100,000.
c) Output will decrease from 10,000 to 5,000.
d) Both (b) and (c) are true.
e) None of the above.

Answer 1

The most likely outcome of a price increase from $10 to $20 by government fiat or monopoly is a decrease in quantity demanded of the good.

None of the provided options (a, b, c, d) fully capture this effect, making (e) None of the above the most suitable answer.

In a separate scenario with a stimulated economy, an $800 billion increase in the money supply with a velocity of 3 could theoretically expand nominal GDP by approximately $1.0909 trillion.

Step-by-step explanation:

When the government or a monopoly increases the price of a good, several effects can occur, but regarding the options given, the most likely consequence is a decrease in the quantity demanded of the good. This is assuming that the demand is elastic, where consumers will buy significantly less when the price doubles.

This is described in option (c) Output will decrease from 10,000 to 5,000. It does not necessarily mean that the quantity of money in circulation will increase, as that is a separate action typically undertaken by the central bank, nor does it imply that velocity will change in the manner stated.

In the scenario where the central bank increases the money supply by $800 billion and the velocity is 3, we can calculate the impact on GDP using the quantity equation of money (MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is the output or real GDP).

Initially, the money supply (M) is $4 trillion. With the velocity (V) at 3 and the price level (P) initially at 100, the GDP is $12 trillion (since MV = PY or 4 trillion * 3 = 100 * Y).

Now, with an $800 billion increase in M, the new money supply is $4.8 trillion. The new price level after stimulus is projected to be 110, so we can solve for the new GDP (Y).

Applying the equation MV = PY: $4.8 trillion * 3 = 110 * Y, Y (new GDP) can be solved as approximately $13.0909 trillion. This increase in the money supply would theoretically expand the economy by approximately $1.0909 trillion in nominal terms, assuming there is no change in velocity or other factors affecting Y.