economic 5. The equation of exchangeThe equation of exchange is given by M x V = PxQ, where M is the money supply, V is the velocity of money, P is the economy's price level,and Q is Real GDP.Suppose the following diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy.PRICE LEVEL1O23REAL GDP (Trillions of dollars)AD0 2 0 2? What is the GDP of this economy?$9 trillion$12 trillion$6 trillion$15 trillionIf the velocity of money is 3, the money supply in this economy isAdjust the previous graph to show the effects of a decrease in the money supply.Based on the new price level, what must the new money supply be in the long run if the velocity of money remains at 37$3 trillion$1 trillion$2.5 trillion$2 trillionBecause velocity is assumed to be constant, the percentage decrease in the price level is the same as the percentage decrease in themoney supply. This illustrates thesimple quantity theory of money

The quantity theory of money: MV = PY Where M is the money supply V is the velocity of money P is…

Answered: The equation of exchange is given by…

The equation of exchange is given by MxV=PxQ, where M is the money supply, V is the velocity of money, P is the economy's price level, and Q is Real GDP.

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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economic

5. The equation of exchange
The equation of exchange is given by M x V = PxQ, where M is the money supply, V is the velocity of money, P is the economy's price level,
and Q is Real GDP.
Suppose the following diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy.
PRICE LEVEL
1
O
2
3
REAL GDP (Trillions of dollars)
AD
0 2 0 2
?

What is the GDP of this economy?
$9 trillion
$12 trillion
$6 trillion
$15 trillion
If the velocity of money is 3, the money supply in this economy is
Adjust the previous graph to show the effects of a decrease in the money supply.
Based on the new price level, what must the new money supply be in the long run if the velocity of money remains at 37
$3 trillion
$1 trillion
$2.5 trillion
$2 trillion
Because velocity is assumed to be constant, the percentage decrease in the price level is the same as the percentage decrease in the
money supply. This illustrates the
simple quantity theory of money

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