Suppose velocity is constant at 4,real output is 10,and the price level is 2.From this initial situation,the government increases the nominal money supply to 6.If velocity and output remain unchanged,by how much will the price level increase?
A)2)4%
B)20%
C)24%
D)50%

Question

Quizplus · Accepted Answer

Using the Quantity Theory of Money (M x V = P x Y), we can solve for the new price level. 
Initial situation: 
M = 10/2 x 4 = 20 
New situation: 
(6) x (4) = P x (10/2) 
24 = 5P 
P = 4.8 
The price level increases by 20%, which is the difference between the initial price level and the new price level expressed as a percentage of the initial price level: (4.8-2)/2 x 100% = 20%.

Suppose Velocity Is Constant at 4,real Output Is 10,and the Price