Asked by Michelle Carrey on May 24, 2024
Verified
According to the assumptions of the quantity theory of money, if the money supply increases by 4 percent, then
A) nominal and real GDP would rise by 0.40 percent.
B) nominal GDP would rise by 4 percent; real GDP would be unchanged.
C) nominal GDP would be unchanged; real GDP would rise by 4 percent.
D) neither nominal GDP nor real GDP would change.
Quantity Theory
An economic theory that links the quantity of money in an economy to the level of prices of goods and services.
Money Supply
At a specific instant, the total monetary assets within an economy, including coins, cash, and the amounts present in checking and savings accounts.
- Use the quantity theory of money to project how changes in the money supply can influence nominal and real GDP.
Verified Answer
KS
karan singhMay 27, 2024
Final Answer :
B
Explanation :
The quantity theory of money suggests that an increase in the money supply will directly increase nominal GDP by the same percentage, assuming velocity of money and real output (real GDP) remain constant. Therefore, if the money supply increases by 4 percent, nominal GDP would also increase by 4 percent, but real GDP would remain unchanged because the increase in nominal GDP is attributed to inflation rather than an increase in physical output.
Learning Objectives
- Use the quantity theory of money to project how changes in the money supply can influence nominal and real GDP.