Assume the money supply is $500, the velocity of money is 8, and the price level is $2. Using the quantity theory of money:
a. Determine the level of real output. $.
b. Determine the level of nominal output. $.
c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent?
Nominal output would be $ , and real output would be $ .
Quantity theory of money equation
MV=PY
M is money supply
P is price
V is velocity of money
Y is real GDP
a.
the money supply is $500, the velocity of money is 8, and the price level is $2.
MV=PY
500*8=2*Y
Y=4000/2
=$2000
b.
Nominal GDP = P*Y
=2*2000
=$4,000
c.
Assuming velocity remains constant, what will happen if the money supply rises 20 percent
Increase in the money supply= 20% of 500
=(20*500)/100
=100
New money supply = 500+100
=600
MV=PY
600*8=2*Y
Y=4800/2
=$2400
Nominal output would be =P*Y
=2400*2
=$4800
and real output would be $2,400 .
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