According to the quantity theory of money, what happens if the money supply increases by $10 \%$ if the current rate of unemployment is equal to the natural rate of unemployment?

Choose 1 answer:
(A) The price level increases by $5 \%$ and real output increases by $5 \%$
(B) Real output increases more than the increase in the price level
(C) Real output increases $10 \%$
(D) Real output and the velocity of money both increase
() The price level increases by $10 \%$

Question

According to the quantity theory of money, what happens if the money supply increases by $10 \%$ if the current rate of unemployment is equal to the natural rate of unemployment?

Choose 1 answer:
(A) The price level increases by $5 \%$ and real output increases by $5 \%$
(B) Real output increases more than the increase in the price level
(C) Real output increases $10 \%$
(D) Real output and the velocity of money both increase
() The price level increases by $10 \%$

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ According to the quantity theory of money, the equation is given by $ MV = PY $, where $ M $ is the money supply, $ V $ is the velocity of money, $ P $ is the price level, and $ Y $ is the real output. ‖ ‖ step 2 ⋮ When the current rate of unemployment is equal to the natural rate of unemployment, the economy is at full employment, meaning that real output $ Y $ is at its potential level and does not change with changes in the money supply. ‖ ‖ step 3 ⋮ Given that $ V $ (velocity of money) is constant, an increase in the money supply $ M $ by 10% will lead to a proportional increase in the price level $ P $ by 10%, since $ Y $ remains unchanged. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Quantity Theory of Money⚹ ∻Explanation∻ ⚹According to the quantity theory of money, if the money supply increases by 10% and the economy is at full employment (natural rate of unemployment), the price level will increase by 10% while real output remains unchanged.⚹◊What statistical analysis can be used to determine the relationship between the money supply increase and its impact on the price level and real output in the context of the quantity theory of money?⍭ Generate me a similar question◊

Sia