Final answer:
The example on page 665 illustrates how an $800 billion monetary stimulus is expected to increase the quantity of goods and services in the economy by 10.9 billion by using the quantity equation of money.
Step-by-step explanation:
The question regards calculating the effects of a monetary stimulus using the quantity equation of money in an economic context. This problem is geared towards understanding how changes in the money supply can affect economic activity.
Step-by-Step Calculation:
- Identify the initial money supply, which is $4 trillion.
- Acknowledge the planned increase in money supply, which is $800 billion.
- Recognize that the velocity of money is estimated to be 3 and that the price level is expected to increase from 100 to 110.
- The quantity equation of money is given by MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services.
- To find the new quantity of goods and services (Q'), calculate the initial quantity of goods and services (Q) by dividing the initial money supply (M) multiplied by the velocity (V) by the initial price level (P).
- Calculate Q' using the new money supply (M + the $800 billion increase) multiplied by V, divided by the new price level (P').
- Subtract Q from Q' to find the change in the quantity of goods and services due to the monetary stimulus.
Monetary stimulus is expected to increase the quantity of goods and services in the economy by 10.9 billion, as given by the example on page 665.