Q6/PG.331: Suppose that an economy characterized by

M = $6,000 billion

V = 2.5

P = 100

(a) What is the real value of output (Q)?

Now assume that the Fed increases the money supply by 10% and velocity remains unchanged.

(b) If the price level remains constant, by how much will real output increase?

(c) If, instead, real output is fixed at the natural level of unemployment, by how much will prices rise?

(d) By how much would V have to fall to offset the increase in M?

M = $6,000 billion

V = 2.5

P = 100

(a) What is the real value of output (Q)?

Now assume that the Fed increases the money supply by 10% and velocity remains unchanged.

(b) If the price level remains constant, by how much will real output increase?

(c) If, instead, real output is fixed at the natural level of unemployment, by how much will prices rise?

(d) By how much would V have to fall to offset the increase in M?

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