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.
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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
100%
economic
Transcribed Image Text: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
?
Transcribed Image Text: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
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education