If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively

If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively, what happens to the price level (P) if the money supply (M) declines from $475 billion to $375 billion?

Expert Solution

The equation of exchange is

MV=PY

M=475

V=4

Y=1250

P=?

P=MV/Y

P=(475*4)/1250

=1.52

the price level is 1.52

and the M changes to 375

P=(375*4)/1250

=1.2

The price level changes from 1.52 to 1.2.

Rahul Sunny answered 1 year ago

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Question

If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively

Solutions

Expert Solution

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