Velocity in the country of Nemedia is always stable.In 2012,the money supply was $100 billion and real GDP was $300 billion.In 2013,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 2012 and 2013?
A)10.0 percent
B)9.50 percent
C)4.76 percent
D)2.38 percent

Question

Quizplus · Accepted Answer

We can use the equation of exchange: MV=PY, where M is money supply, V is velocity (assumed to be constant), P is the price level, and Y is real GDP. 
In 2012, we have:
100V = P*300 
In 2013, with a 10% increase in M and 5% increase in Y, we have:
110V = P*315 
Dividing the two equations, we get:
P2013/P2012 = (110/100)*(315/300) = 1.0476
Therefore, the price level increased by 4.76 percent.

Velocity in the Country of Nemedia Is Always Stable