According to the quantity equation, if velocity is constant at two and real GDP is constant at 10 000, then, if the money supply is increased from 6250 to 6500, the price level:
A)increases to 1.25
B)increases to 1.3
C)increases to 1.5
D)is constant at 1.25

Question

Quizplus · Accepted Answer

The quantity equation is MV=PY, where M is the money supply, V is the velocity, P is the price level, and Y is real GDP. If velocity is constant at 2 and real GDP is constant at 10,000, then we can solve for the initial price level: MV/PY = 6250*2/(P*10000) = 0.125.

When the money supply increases from 6250 to 6500, we can set up a new equation: 6500*2/(P*10000) = 0.13. Solving for P, we get P = 1000/0.13 = 7692.

Therefore, the price level has increased from the initial level of 1.25 (or 125%) to 1.3 (or 130%). The correct choice is B.

According to the Quantity Equation, If Velocity Is Constant at Two