Suppose that initially the money supply is $2 trillion, the price level equals 4

Question

Suppose that initially the money supply is $2 trillion, the price level equals 4, the real GDP is $6 trillion in base-year dollars, and income velocity of money is 12. Then the money supply increases by $200 billion, while real GDP and income velocity of money remain unchanged.

Suppose that initially the money supply is $2 trillion, the price level equals 4, the real GDP is $6 tillion in base-year dollars, and income velocity of money is 12. Then the money supply increases by $200 billion, while real GDP and income velocity of money remain unchangecd. a. According to the quantity theory of money andprices, calculate the new price level after the increase in money supply .

Explanation / Answer

According to QTM, MV = PY

(2 trillion + 0.2 trillion) x 12 = P x 6 trillion

2.2 trilliom x 12 = P x 6 trillion

P = 26.4 trillion/6 trillion = 4.4

So, new price is 4.4

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