Velocity in the country of Coruba is always stable. In 2018, the money supply was $100 billion and real GDP was $300 billion. In 2019, the money supply increased by 10 percent, real GDP increased by 5 percent, and nominal GDP equalled $660 billion. By how much did the price level increase between 2018 and 2019?
A) 2.38 percent
B) 4.76 percent
C) 9.50 percent
D) 10.0 percent

Question

Quizplus · Accepted Answer

To find the change in price level, we can use the equation:

MV = PQ

where M is the money supply, V is velocity (which is assumed to be constant), P is the price level, and Q is real GDP.

In 2018, we can solve for P:

100 billion x V = P x 300 billion

P = 100/3

In 2019, we can solve for P again:

110 billion x V = P x 315 billion

P = 2,092/45

The percentage change in P is:

((2,092/45) - (100/3)) / (100/3) x 100% = 4.76%

Therefore, the price level increased by 4.76 percent between 2018 and 2019. The best choice is B.

Velocity in the Country of Coruba Is Always Stable