Average prices in Canukada are 200, real GDP is 30, and the money supply is 500. An increase in the money supply to 600 leads to average prices of
A) 250.
B) 220.
C) 300.
D) 240.
E) none of the above answers.

Question

Quizplus · Accepted Answer

To solve this question, we can use the equation of quantity theory of money:

MV = PQ

Where: 
M = Money supply 
V = Velocity of money 
P = Price level 
Q = Real GDP

We are given: 
M1 = 500 
P1 = 200 
Q1 = 30

To find P2, we need to find the new value of M2:

M2 = 600

We can rearrange the equation as follows:

P2 = (M2/Q1) * V1

To solve for V1, we can use the identity:

M1V1 = P1Q1

V1 = P1Q1/M1

Substituting the values:

V1 = (200*30)/500 = 12

Now we can substitute the values of M2 and V1 to find P2:

P2 = (600/30) * 12 = 240

Therefore, the answer is D, 240.

Average Prices in Canukada Are 200, Real GDP Is 30