Question

What is the key endogenous variable in the quantity theory? Explain the effect on this key variable of the following changes:

A. The money supply is doubled

B. The velocity of money increases by 10%

C. Real GDP rises by 2%

D. The money supply increases by 3% while real GDP rises by 3% at the same time

Answer #1

Price level is the endogenous variable in the quantity theory

A) The money supply is doubled.

MV = PQ

Where M= money supple, V = the velocity of money, P = the price level, and Q = real GDP

Price Level will also double

B) The velocity of money increases by 10%.

Price Level will also increases by 10%.

c)Real GDP rises by 2%

new Price level = MV/1.02Q

Price Level = 98%*Old Price Level

Price Level will decrease by 2%

D) The money supply increases by 3% while real GDP rises by 3% at the same time.

new Price level = 1.03*MV/1.03Q = MV/Q

No Effect

Thank you....

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