Question

Statistics

Posted 3 months ago

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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 $10 \%$
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Answer from Sia

Posted 3 months ago

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.

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