The velocity of money is 20, real GDP is 100 and the money supply is 100. According to the quantity theory of money, a 10 percent increase in the money supply causes a

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Solving for P, we get P = MV/Y. With a velocity of money of 20, real GDP of 100, and money supply of 100, we get P = (100x20)/100 = 20. A 10 percent increase in the money supply would make M = 110. Solving for P, we get P = (110x20)/100 = 22. This represents a 10 percent increase in the price level, so the answer is B.

The Velocity of Money Is 20, Real GDP Is 100