The quantity equation with constant velocity Consider the quantity equation M ti
ID: 1218347 • Letter: T
Question
The quantity equation with constant velocity Consider the quantity equation M times V = P times Y, where M is the quantity of money, V is the velocity of money, P Is the average price of goods and services, and Y is the level of real output of goods and services. Suppose the following conditions hold: Velocity is fixed. The factors of production and the production function determine the level of output. Suppose that the Federal Reserve unexpectedly decides that it wants to increase the money supply by 5 percentage. According to the quantity theory of money, which of the following results will occur? Check all that Apply. Inflation will be equal to 5 percentage. Prices will remain the same. Nominal GDP will increase by more than 5 percentage. Nominal GOP will increase by 5 percentage. Suppose that when you took out a mortgage for your home purchase 10 years ago, expected inflation was only 3 percentage. Because the actual Inflation rate was lower higher than expected, this hurts .Explanation / Answer
According to Quantity Theory of Money, level of prices varies directly with quantity of money.
So, increase in money supply by 5% will bring an increase of 5% in price level as well.
Increase in price level is referred to as inflation. So, inflation will be equal to 5%.
Nominal GDP is calculated by multiplying the current production of final goods and services by current year's prices.
With no change in real output, this rise in current year prices by 5% will increase the nominal GDP by 5% as well.
Hence, option (1) and (4) are correct answers.
When actual inflation turns out to be higher than expected inflation, borrowers gain while creditors lose.
So, suppose that when you took out a mortgage for your home purchase 10 years ago, expected inflaiton was only 3%. Because the actual inflation rate was higher than expected, this hurts creditors or bank.
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