Average prices in Canukada are 200, real GDP is 30, and the money supply is 500. An increase in the money supply to 700 leads to average prices of
A) 250.
B) 280.
C) 300.
D) 240.
E) none of the above answers.

Question

Quizplus · Accepted Answer

The Quantity Theory of Money can be represented by the equation MV = PQ, where M is the money supply, V is the velocity of money (assumed constant here), P is the price level, and Q is the real GDP. If the money supply increases from 500 to 700 (a 40% increase) and the real GDP remains constant, the price level must increase by 40% to maintain the equation's balance. Since the original average price was 200, a 40% increase leads to new average prices of 280 (200 * 1.40 = 280).

Average Prices in Canukada Are 200, Real GDP Is 30