Question

The price level equals 4​, the real GDP is ​$6 trillion in​ base-year dollars, and income velocity of money is 12. Then the money supply increases by ​$200 ​billion, while real GDP and income velocity of money remain unchanged. According to the quantity theory of money and prices, calculate the new price level after the increase in money​ supply Calculate the percentage increase in money​ supply Calculate the percentage change in the price​ level The percentage changes in the money supply is ______________ percentage changes in the price level. (pick one from below) less than the greater than the equal to the

Answer 1

The correct answer is "The percentage changes in the money supply is equal to the percentage changes in the price level" according to the equation of exchange

Step-by-step explanation:

The Equation of Exchange deals with the relationship between money and price level, and also between money and real GDP.

The equation simply states: M x V = P x Y

Where M = the money supply

V = the velocity of money

P = the price level

Y = real GDP

Velocity is the number of times the average dollar is spent to buy final goods and services in a given year.

Velocity can be calculated by using V = (P x Y ) / M

The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y).

Since (P x Y) is equal to the real GDP, then M x V = real GDP

Velocity (V) and Real GDP (Y) are effectively constant in the short run, therefore any changes in money supply (M), will cause a proportional change in the price level (P).

This equation demonstrated a direct relationship between price and money supply. If V and Y are constant, a certain percentage change in money supply will cause an equal amount of change in the price level.