The following graph shows the current aggregate demand (AD) and long run aggrega

Question

The following graph shows the current aggregate demand (AD) and long run aggregate supply (LRAS) curves in a hypothetical economy. 1. From the graph, the nominal GDP in this economy is _____. A. $6 trillion B. $30 trillion C. $12 trillion D. $18 trillion E. $24 trillion
2. Suppose the velocity of money is 2, then the money supply in this economy is _____. A. $6 trillion B. $9 trillion C. $0.11 trillion D. $3 trillion E. $36 trillion
3. Shift the AD curve in the previous diagram to show the effects of an increase in the money supply.
4. Based on the new price level, what must the new money supply be in the long run if the velocity of money remains at 2? A. $5 trillion B. $0.07 trillion C. $10 trillion D. $15 trillion
5. Because ______(a. The AD curve is downward sloping b. Velocity is assumed to be constant c. The federal reserve controls M) the percentage increase in the price level is _____(greater than/less than/the same as) the percentage increase in the money supply. This illustrates the _______(a. Quantity theory of money b. Fact that monetary policy can increase real GDP c. Importance of the federal reserve)

Explanation / Answer

1) Nominal GDP = Real GDP *Price = 3*6 trillion $ = 18trillion $ Option D)

2) Using M*V= P*Y

M* 2= 6* 3

M= 9 TRILLION$ OPTION B)

3) An increase in money supply would cause AD to shift to the right as consumers would be able to spend more now and will demand for goods more. Hence Ad shifts to the right by the extent of increase in quantity of money supply.

4) Using the equation MV=PY

M *2 = 10* 3

M= 15$ trillion

5) Because a) the percentage increase in the price level is the same as the percentage increase in the money supply. This illustrates the Quantity theory of money.

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