Suppose the real interest rate is 4% and the expected inflation rate is 3%.If the money supply increases by 10% and output,the real interest rate,and the expected inflation rate are unchanged,then the price level increases by
A)3%.
B)4%.
C)7%.
D)10%.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if the money supply increases by 10% and output (real GDP), the real interest rate, and the expected inflation rate are unchanged, then the price level must also increase by the same percentage as the increase in the money supply, which is 10%. This is because, with output and velocity constant, an increase in the money supply directly translates to an increase in the price level.

Suppose the Real Interest Rate Is 4% and the Expected