Quantecon is a country in which the quantity theory of money operates.The country has a constant population, and technology.In year 1, real GDP was $400 million, the GDP deflator was 200 a price level of 2), and the veloc circulation was 20. In year 2 the quantity of money was 20 percent higher than in year 1.The quantity of money in year 1 was _______.
The quantity of money in year 2 was _______.
The GDP deflator in year 2 is _______.
A)$40 million; $48 million; 240
B)$20 million; $24 million; 220
C)$80 million; $88 million; 200
D)$20 million; 24 million; 240
E)$40 million; $48 million; 220

Question

Quizplus · Accepted Answer

The quantity theory of money is given by MV = PY. In year 1, M = $40 million (since 20 * $40 million = 2 * $400 million). In year 2, M is 20% higher, so $48 million. With constant velocity and real GDP, the GDP deflator in year 2 is 240.

Quantecon Is a Country in Which the Quantity Theory of Money