If the money supply increases 10-percent,velocity decreases 5-percent,and the price level increases 6-percent,then the change in real GDP is

Question

Quizplus · Accepted Answer

The equation of exchange is MV=PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP.

Using this equation, we can solve for the change in real GDP, denoted as ΔQ:

ΔQ = (ΔM - ΔV + ΔP)/k

where k is the parameter determining the sensitivity of output to changes in the other variables, which is typically assumed to be constant.

Plugging in the given values, we get:

ΔQ = (0.1 - (-0.05) + 0.06)/k
ΔQ = 0.21/k

Since k is positive (output is assumed to be increasing in the other variables), we know that ΔQ is negative: a 1% increase in the money supply should lead to less than a 1% increase in real GDP.

Therefore, the closest answer choice is C) -1, which indicates a decrease of 1% in real GDP.

If the Money Supply Increases 10-Percent,velocity Decreases 5-Percent,and the Price