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Suppose the supply of money, measured by M1, is $2.6 trillion, output, measured by real GDP, is $21.4 trillion, and the...

Suppose the supply of money, measured by M1, is $2.6 trillion, output, measured by real GDP, is $21.4 trillion, and the velocity of money is 9.4. Suppose the supply of money increases to $4.9 trillion but GDP and the velocity of money do not change. What is the percent by which prices change? Provide your answer as a percentage rounded to two decimal places. Do not include any symbols, such as "$," "=," "%," or "," in your answer.

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Answer #1

It is given that there is no change in the GDP and the velocity of money. From the quantity equation we know that

Growth rate of real GDP + rate of inflation = growth rate of money supply + growth rate of velocity of money

Now growth rate of real GDP and growth rate of velocity of money both are zero. Equation is now changed to

Rate of inflation = growth rate of money supply

= (4.9-2.6)*100/2.6

= 88.46%

Percentage by which prices are increased is 88.46.

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