Question

If the money supply is $6,000, velocity is 5, and Real GDP is 10,000 units of output, then the price level is _____________. If the money supply doubled over a short time period to $12,000, the simple quantity theory of money would predict that _____________________.

Answer 1

Answer and Explanation:

The computation is shown below:

The Price level in the normal case

= Money supply ÷ Real GDP × Velocity

= $6,000 ÷ 10,000 units × $5

= $3

Now in the case when the money supply doubled i.e $12,000

So, the price level is

= Money supply ÷ Real GDP × Velocity

= $12,000 ÷ 10,000 units × $5

= $6

When the money supply doubles, the price level is also doubled that indicated the direct relationship between the price level and money supply