If real money demand increases 5% and real money supply increases 10%,by about how much does the price level change?

Question

Quizplus · Accepted Answer

If real money demand increases by 5% and real money supply increases by 10%, it means that the amount of real money available in the economy has increased. There is more money chasing the same amount of goods and services which causes inflationary pressure on the economy. This increase in the supply of money exceeds the increase in the demand for it which means that there is likely to be a rise in the price level. Hence, the correct option is D, which says that the price level will rise by 5%.

If Real Money Demand Increases 5% and Real Money Supply