Final answer:
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.