Assume that the velocity of money in Theopolis is 3 and the aggregate supply curve is vertical at $\$ 100$ million.

What impact will a $10 \%$ increase in the money supply have on real output?

Choose 1 answer:
(A) Real output will increase by $3 \%$
(B) There will be no impact on real output
(C) Real output will increase by $30 \%$
(D) Real output will increase by $\frac{3}{10 \%}$
(E) Real output will increase by $10 \%$

Question

Assume that the velocity of money in Theopolis is 3 and the aggregate supply curve is vertical at $\$ 100$ million.

What impact will a $10 \%$ increase in the money supply have on real output?

Choose 1 answer:
(A) Real output will increase by $3 \%$
(B) There will be no impact on real output
(C) Real output will increase by $30 \%$
(D) Real output will increase by $\frac{3}{10 \%}$
(E) Real output will increase by $10 \%$

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To analyze the impact of a change in the money supply on real output, we use the Quantity Theory of Money, which is expressed as $ 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 ⋮ Given that the velocity of money $ V $ is 3 and the aggregate supply curve is vertical, implying that real output $ Y $ does not change with changes in the money supply or the price level. ‖ ‖ step 3 ⋮ A 10% increase in the money supply $ M $ would normally affect the product $ MV $, but since $ Y $ is fixed and the aggregate supply curve is vertical, the entire effect of the increase in $ MV $ will be absorbed by a change in the price level $ P $, not $ Y $. ‖ ‖ step 4 ⋮ Therefore, the real output $ Y $ will remain unchanged at $100 million, and there will be no impact on real output due to the increase in the money supply. ‖ ∻Answer∻ ***B*** ∻Key Concept∻ ⚹Quantity Theory of Money and Vertical Aggregate Supply⚹ ∻Explanation∻ ⚹In the context of a vertical aggregate supply curve, an increase in the money supply does not affect real output, which remains constant; instead, it affects the price level.⚹◊What statistical method could be used to analyze the impact of a 10% increase in the money supply on real output in this⍭ Generate me a similar question◊$

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