Question

Suppose that initially the money supply is $1 trillion, the price level equals 3, the real GDP is $5 trillion in base-year dollars, and income velocity of money is 15. Then the money supply increases by $100 billion, while real GDP and income velocity of money remain unchanged. a. According to the quantity theory of money and prices LOADING..., calculate the new price level after the increase in money supply: nothing.

Answer #1

Intial money supply=$1trillion=1000billion

If there is an increase in money supply by $100 billion then new money supply=1100billion

Thus money supply increase by 10% which means price level/Inflation will increase by 10%

because According to Quantity theory of money MV=P*Y where Velocity and Y(real output) is constant.

Thus there will be an equal change in price level and money supply.

Thus new price will be 10% higher than initial price

new price=3*1.1=3.3

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