Using the Cambridge equation, by how much does the demand for money rise at a constant real GDP of $2,000 billion when the price level rises by 10 percent from 1.00, given k = 0.25?
A) $200 billion
B) $20 billion
C) $550 billion
D) $50 billion

Question

Quizplus · Accepted Answer

The Cambridge equation is Md = kPY. With k = 0.25, P = 1.00, and Y = $2,000 billion, the initial money demand is 0.25 * 1.00 * 2000 = $500 billion. When the price level rises by 10% to 1.10, the new money demand is 0.25 * 1.10 * 2000 = $550 billion. The increase in money demand is $550 billion - $500 billion = $50 billion.

Using the Cambridge Equation, by How Much Does the Demand