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
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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