Question

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 $ .

Answer #1

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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