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Suppose that initially the money supply is ​$1 ​trillion, the price level equals 3​, the real...

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.

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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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