**Economic Concepts: Price Level and Money Supply**In this exercise, we explore the relationship between price level, money supply, velocity, and aggregate output using the equation of exchange: \[ MV = PY \]where:- $ M $ is the money supply,- $ V $ is the velocity of money,- $ P $ is the price level,- $ Y $ is the aggregate output.**Scenario:** The velocity ($ V $) remains constant at $4, and the aggregate output ($ Y $) is $1,250 billion. We aim to understand how changes in the money supply ($ M $) affect the price level ($ P $).Originally, the money supply is $500 billion, and we need to find the initial price level ($ P $). Then, we analyze what happens when the money supply ($ M $) decreases to $400 billion.**Questions:** - What is the original price level ($ P $) when $ M = $500 billion $?- What happens to $ P $ when $ M $ declines to $400 billion?**Instructions:** Round your responses to two decimal places. Use the equation of exchange to solve for the price level initially and after the decline in money supply.

Answered: Image /qna-images/answer/63f92dc9-1a7a-44a1-8f54-0e2124927629.jpg

If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively, what happens to the price level (P) if the money supply (M) declines from $500 billion to $400 billion? Originally, the price level is (Round your response to two decimal places.)

If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively, what happens to the price level (P) if the money supply (M) declines from $500 billion to $400 billion? Originally, the price level is (Round your response to two decimal places.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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