Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![**Economic Concept: Calculating the Price Level Using the Quantity Theory of Money**
**Question:**
If the money supply is $14,500, real GDP is 30,500, and the velocity of money is 2.3, then how much is the price level?
**Explanation:**
To find the price level, use the Quantity Theory of Money formula:
\[ MV = PY \]
Where:
- \( M \) = Money Supply = $14,500
- \( V \) = Velocity of Money = 2.3
- \( P \) = Price Level
- \( Y \) = Real GDP = 30,500
**Calculation:**
1. Plug the values into the formula:
\[
14,500 \times 2.3 = P \times 30,500
\]
2. Solve for \( P \):
\[
33,350 = P \times 30,500
\]
\[
P = \frac{33,350}{30,500}
\]
\[
P \approx 1.0934
\]
Thus, the price level is approximately 1.0934.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6584b91b-d6ef-4af6-9410-b6c972bdd4bb%2Ffb0dc746-a81f-4f98-b2e3-42806324cadc%2Fda4xhnd_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Economic Concept: Calculating the Price Level Using the Quantity Theory of Money**
**Question:**
If the money supply is $14,500, real GDP is 30,500, and the velocity of money is 2.3, then how much is the price level?
**Explanation:**
To find the price level, use the Quantity Theory of Money formula:
\[ MV = PY \]
Where:
- \( M \) = Money Supply = $14,500
- \( V \) = Velocity of Money = 2.3
- \( P \) = Price Level
- \( Y \) = Real GDP = 30,500
**Calculation:**
1. Plug the values into the formula:
\[
14,500 \times 2.3 = P \times 30,500
\]
2. Solve for \( P \):
\[
33,350 = P \times 30,500
\]
\[
P = \frac{33,350}{30,500}
\]
\[
P \approx 1.0934
\]
Thus, the price level is approximately 1.0934.
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