Imagine two economies that are identical except that for a long time,economy A has had a money supply of $500 billion while economy B has had a money supply of $1,000 billion.It follows that
A)real GDP and the price level are higher in country B.
B)real GDP, but not the price level, is higher in country B.
C)the price level, but not real GDP is higher in country B.
D)neither the price level nor real GDP is higher in country B.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the level of prices is directly proportional to the money supply. Therefore, the price level in country B, which has a higher money supply, will be higher than that of country A. Real GDP, however, is not affected by changes in the money supply in the long run, so it is the same in both economies.

Imagine Two Economies That Are Identical Except That for a Long