Question

The accompanying graph shows the relationship between the average annual increase in the price level and the average annual increase in money supply across eight countries. 45-degree I Harpoglia a. What concept, related to monetary policy, does this graph help demonstrate? Valko Cherbani O Ragnar Nurkse's balanced growth theory O the liquidity preference model O buffer theory O convergence hypothesis Caz Resa Tyndaria Harnnastas Veckram eGonmorl'n monetary neutrality Increase in money supply (%) Use the concept or model identified in part a to determine the long-run effect of a 30% increase in the money supply. b. In the long run, a 30% increase in the money supply will result in 0 a 30% increase in the price level. 0 a 15% decrease in the price level. 0 a 15% increase in the price level. O no increase in the price level. 0 a 30% decrease in the price level.

Answer 1

The given figure stipulated below as follows Herpoglia Valko Cherbani Caz Resa Tvndaria Harnnastas ul Veckram Gonmorl'n Increase in money Supply (90) Figure 1 a. In figure-1, with rise in money supply, there is an increase in price level. This explains the monetary neutrality, that the increase in money supply has effect on nominal variables like Price, wages and exchange rate but have no effect real variables like unemployment, Gross Domestic Product, and likewise Thus, the correct answer is Monetary Neutrality

b. As stated, money neutrality, in the long run, the increase in money supply affects the price level, but has not effects on real variables. Using quantity theory of money, it states that general price level is directly proportional to amount of money supply Thus, correct option is! a 30% increase in price level