Question

2. The money supply (Ml) increased from $1,604 billion in December 2008 to $3,342 billion in December 2016. According to the basic classical model supplemented by the Quantity Theory of Money, what would be the effects of the increase in the money supply on: a. Output and the price level? b. The quantity of labor, the real wage, and the nominal wage? c. National saving, investment, and the real interest rate?

Answer 1

as Output The Quantity Output and Price Level: - Quantity theory of money states that: Mx v= Px; where M is money supply V is Velocity, I e is price lene An Y is Output increase in the level of money supply price level by will same in amount arcumina ou and y are constant. Thus Output remains constant and price tenet increases. b) Quantity of Labor Real wage & Nominal wage. As price level increases, money I nominal wage will increase by the same amount o which will keep real. wages constant and Quantity of labor or employment also remain same and unaffected. National saning Investment and Real Interest rate - The real interest rate remains and constant this lend of National sanings and Forrestment will abo remain same. anh supply in money increase in This classical model, has no impact and on variables it Neminal in the economy real variables