Asked by Renee White on May 19, 2024
Verified
According to the assumptions of the quantity theory of money, if the money supply decreases by 4 percent, then
A) nominal and real GDP would fall by 4 percent.
B) nominal GDP would fall by 4 percent; real GDP would be unchanged.
C) nominal GDP would be unchanged; real GDP would fall by 0.40 percent.
D) neither nominal GDP nor real GDP would change.
Quantity Theory
An economic theory that suggests the general price level of goods and services is directly proportional to the amount of money in circulation.
Money Supply
The total economic resources available in an economy at a certain period, including cash, coins, and the money in checking and savings accounts.
- Implement the quantity theory of money to anticipate adjustments in nominal and real GDP due to shifts in the money supply.
Verified Answer
JY
Jenna YuranMay 20, 2024
Final Answer :
B
Explanation :
The quantity theory of money suggests that a change in the money supply directly affects nominal GDP in the same proportion, assuming velocity of money and real GDP are constant. Therefore, if the money supply decreases by 4 percent, nominal GDP would fall by 4 percent, but real GDP would remain unchanged.
Learning Objectives
- Implement the quantity theory of money to anticipate adjustments in nominal and real GDP due to shifts in the money supply.