Question

• if the velocity of money is 2, the money supply in this economy is ($4.5 trillion/ $18 trillion/ $27 trillion/ $36 trillion/ $45trillion /$54 trillion)

•because ( the federal reserve controls M/ velocity is assumed to be constant/ the AD curve is downward sloping ), the percentage increase in the price level Is ( less then/ the same as/ greater then ) the percentage increase im the money supply. the illustrates the ( importance of the federal reserve / simple quantity theory of money / fact that monetary policy can increase real GDP )

4. The equation of exchange The equation of exchange is given by M x V-PxY, where M is the money supply, V is the velooity of money, P is the economy's price level, and Y is real GOP Suppose the following diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy. AD AS 25 REAL GOP (Trisions of dollars) Nomingl GDP in this economy is triion. 15 12 REAL GOP (Trillions of dellars) 18 Nominal GOP in this economy is 3 tllion. trillion. If the velocity of money is 2, the money supply in this economy is Shift the AD curve on the previous diagram to show the effects of an increase in the money supply. to the desired position, Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther Based on the new price level, the new money supply must be S trillion in the long run if the velocity of money remains at 2 Because , the percentage increase in the price level isthe percentage increase in the money supply. This illustrates the Contnue without saving

Answer 1

Nominal GDP = Price Level × Real GDP

= 6 × 9 trillion

= $ 54 trillion

Velocity of money = 2

Money supply =

$\large Money supply = \frac{6\times 9}{2}$

$\large Money supply = \frac{54}{2}$

Money supply = $ 27 trillion

The money supply is controlled by the federal reserve, the percentage increase in the price level greater than the percentage change in money supply. This illustrates the simple quantity theory of money.

Due to increase in money supply the aggregate demand curve will shift to its right this will increase the price level of the output. As money supply has increased so this will fuel the inflation. Thus, the prices will increase.

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