Question

Please make sure to answer which way the lines on the graft shift. Also, all parts of the second photo.

M x v-F7x Q. where M is the money supply, V is the velocty of money, P is the economy's price level, and Q is Real GDP ng diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy. 12 AD 10 AS 12 15 18 REAL GDP (Trillions of dollars) What is the GDP of this economy? O $90 trillion O $54 trillion O $108 trillion O $72 trillion If the velocity of money is 2, the money supply in this economy is Adjust the previous graph to show the effects of an increase in the money supply Based on the new price level, what must the new money supply be in the long run if the velocity of money remains at 2? $45 trillion $135 trillion $180 trillion O $112.5 trillion the percentage increase in the , the percentage increase in the pnce level is Because money supply. This illustrates the

Answer 1

a)

Nominal GDP is given as

Real GDP as per Graph=$9 trillion

Price Level=$6

Real GDP=Nominal GDP/Price Level

Nominal GDP=(Real GDP)(Price Level)

Nominal GDP=($9 trillion)($6 )=$54 trillion

Nominal GDP in the earning is $54 trillion

So option B is correct

b)

If velocity of money is 2

and equation of exchange is given as

M*V=P*Q

M=money supply

V=velocity of money

P=economy price level

Q=Real GDP

So using the equation of exchange

M*2=6*9

M=54/2=27

M=$27 trillion

So money supply in economy is $27 trillion

c)

Calculate the new money supply in the long run when velocity is same as 2 and real GDP is also remained 9 trillion

Which is given as by exchange equation

M=(P*Q)/V

New Equllibrum Price level is shifted to 10 So value of P is 10 & Value of Q is Real GDP=9

M=(P*Q)/V=(10*9)/2=90/2=$45 trillion

d)

Because velocity is assumed to be constant ,Percentage increase in price level is same as percentage increase in money supply

This illustrates that Quantative theory of money