2. Consider the following two claims: Claim 1: Because the velocity of money is usually stable...

2. Consider the following two claims:

Claim 1: Because the velocity of money is usually stable over time when the money supply is increased, there is a proportionate change in the nominal value of output as measured by nominal GDP.

Claim 2: Real GDP is primarily determined by the amount of labor, physical capital, human capital and natural resources, as well as the available production technology.

Which of the following statements is most accurate?

a. If claims 1 and 2 are both accurate, then an increase in the money supply must cause a proportionate decrease in the price level.

b. None of these answers

c. If claims 1 and 2 are both accurate, then an increase in the money supply must cause a proportionate increase in the price level.

d. If claims 1 and 2 are both accurate, then when real GDP rises the price level must also rise.

Expert Solution

"C"

If claim 1 and 2 are both accurate then an increase in the money supply must cause a proportionate increase in the price level in the market.

We go by a simple quantity theory of money that MV=PY that is money and velocity is equal to the price and real output. keeping real output and velocity stable any increase in the money supply will proprtionately increase the price level. not the other way round.

Rahul Sunny answered 2 years ago

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