Question

The equation of exchange is given by M×V=P×Y, where M is the money supply, V is the velocity of money, P is the economy's price level, and Y is real GDP. Suppose the following diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy. Nominal GDP in this economy is trillion. If the velocity of money is 3 , the money supply in this economy is Shift the AD curve on the previous diagram to show the effects of an increase in the money suply. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Based on the new price level, the new money supply must be trillion in the long run if the velocity of money remains at 3. Because , the percentage increase in the price level is the percentage increase in the money supply.

Answer 1

The equation of exchange relates the money supply, velocity of money, price level, and real GDP. If the velocity of money is 3 and the nominal GDP is $1 trillion, the money supply can be calculated. Increasing the money supply leads to a shift in the aggregate demand (AD) curve to the right.

Step-by-step explanation:

The equation of exchange, M x V = P x Y, represents the relationship between the money supply, velocity of money, price level, and real GDP in an economy. In this equation, M represents the money supply, V represents the velocity of money, P represents the price level, and Y represents the real GDP. If the velocity of money is 3 and the nominal GDP is $1 trillion, we can rearrange the equation to solve for the money supply: M = (P x Y) / V. Substituting the values, we get M = ($1 trillion) / 3 = $333 billion. Therefore, the money supply in this economy is $333 billion.

To shift the aggregate demand (AD) curve, we would need to increase the money supply. An increase in the money supply will lead to an increase in nominal GDP and a higher price level, resulting in a shift of the AD curve to the right. This shift indicates an increase in the total demand for goods and services in the economy.