Assume the money supply is $500, the velocity of money is 8, and the price level

Question

Assume the money supply is $500, the velocity of money is 8, and the price level is $2. Using the quantity theory of mone a. Determine the level of real output. 2000 b. Determine the level of nominal output. 4000 c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent? Nominal output would be S4800 and real output would be S2400 d. If the government established price controls and also raised the money supply 20 percent, within the quantity theory frame Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empt 2 The velocity of money could increase. 2 The price level would fall. Real output would decrease. Real output would increase. The equation of exchange wouldn't hold The velocity of money could decrease

Explanation / Answer

c. If the money supply rises 20 percent so from 500 to 600 ( 500 * 0.2 = 100 so new money supply = 500 + 100 = 600) , nominal output will rise by 20 percent (from $4,000 to $4,800) so 4000*0.2 = 800 so new nominal output = 4000 + 800 = 4800 but real output will stay the same 2000

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