Suppose that real output is fixed and equal to 400, while velocity is fixed and equal to 5. Then, if the money supply is equal to 200, the price level will be:
A)2.5.
B)5.
C)7.5.
D)10.

Question

Quizplus · Accepted Answer

The price level can be determined using the equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output. Given M = 200, V = 5, and Q = 400, we can solve for P: 200 * 5 = P * 400. Solving for P gives P = 2.5.

Suppose That Real Output Is Fixed and Equal to 400