Question

Your dormitory Griffingate has appointed you as the central banker of its economy, which deals in the currency of wizcoins. Assume that the velocity of wizcoins in Griffingate is constant at 10,000 transactions per yeet. Right now reel GDP is 1,000 wizcoins, and there are 2,000 wizcoins in existence a. What will be the value of each of the veriables that make up the quantity equation? Instructions: Enter your answers as whole numbers. M- wizcoins wizcoins P- wizcoins b. Now indicate how the other variables will respond to each of the following scenarios, taking each case separately and assuming that velocity remains constant Instructions: Enter your answers as whole numbers. 0You increase the money supply to 4,000, and prices increase twofold Real GDP wizcoins () Start with the initial values. Real GDP drops to 500 wizcoins, and the money supply remains constant Price level wizcoins (i) Start with the initial values. Prices increase threefold because of a sudden scarcity of soft drinks, and you decide to keep the supply of wizcoins constant Real GDP wizcoins 0v) Start with the initial values. You increase the money supply to 5.000 wizcoins, and prices rise by 350 percent Real GDP wizcoins

Answer 1

Quantity theory of money: The quantity theory of money shows the identical relationship between the product of velocity of money and the money supply to the product of price level in real output. a. Value of variable M, V and P: The variable M indicates money supply which is equal to the value of money existing in an economy. Thus, money supply is 2,000. Since the transaction is constant at 10,000, the Velocity of money (V) is 10,000. Price (P) can be calculated as follows: 2,000 x 10,000 = P x 1,000 20,000,000 1,000 - 20,000 Price is 20,000

b. l. Real GDP (Y) with increasing money supply 4,000: Real GDP can be calculated as follows: 4,000 x 10,000 = 40,000 x Y 40,000,000 40,000 = 1,000 GDP is 1,000 Price level (P) with reduce the GD to 500 and money supply constant: Since money supply increases double, the price also increases double. Real GDP can be calculated as follows: 2,000 1 0,000 = P x 500 20,000,000 500 40,000 Price is 40,000

Real GDP (Y) with increasing price triple: Real GDP can be calculated as follows: 2,000x10,000 60,000x Y Y 20,000,000 60,000 - 333.33 GDP is 333 vi. Real GDP (Y) with increasing money supply 5,000 and price increases by 350 percent: Real GDP can be calculated as follows: 5,000x 10,000 70,000x Y y50,000,000 70,000 714.29 GDP is 714