Let G be the amount of koban in Japan before the treaty was made. Let S be the a

Question

Let G be the amount of koban in Japan before the treaty was made. Let S be the amount of silver in Japan before the treaty was made. Then, the money supply in Japan measured in terms of ichibu is M = S + b ´ G. In this case, real money balance in Japan become M = S+b´G p . When the edo government increases b three times, p would increase three times. Also M would increase. In this case, what will happen to the real money balance M/p? Does it increase or does it decrease? Answer this question by assuming that S and G stay constant.

Explanation / Answer

We have S and G are constant

When nominal money supply M increases, P also increase and b increases three times

An increase in the price level decreases the real money supply in the economy.

Here change in S equals to zero

Change in real money balance (M/p) would be G times change in b

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