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Question
Statistics
Posted 2 months ago

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

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

Choose 1 answer:
(A) Real output will increase by 3%3 \%
(B) There will be no impact on real output
(C) Real output will increase by 30%30 \%
(D) Real output will increase by 310%\frac{3}{10 \%}
(E) Real output will increase by 10%10 \%
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Answer from Sia
Posted 2 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 MV = PY , where M M is the money supply, V V is the velocity of money, P P is the price level, and Y Y is the real output
step 2
Given that the velocity of money V V is 3 and the aggregate supply curve is vertical, implying that real output Y Y does not change with changes in the money supply or the price level
step 3
A 10% increase in the money supply M M would normally affect the product MV MV , but since Y Y is fixed and the aggregate supply curve is vertical, the entire effect of the increase in MV MV will be absorbed by a change in the price level P P , not Y Y
step 4
Therefore, the real output Y 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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