Question

Suppose that following adjustment to the events in Problem 16-8, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply change?

Short answer

The price level is now double as compared with its value before the income velocity and the money supply change

Step-by-step solution

introduction

It is the times one unit of money can be utilized to enjoy as for the labour and products bought and spent per unit throughout some stretch of time.

explanation

We know,

MV=PY

M = circulating money

V = income velocity

P = equilibrium price level

Y = real GDP

In the event that the Feds halves the Money supply down the middle and with the given Y staying at its for some time run potential level would bring about a doubling of the income velocity of money V. The price level is now double as compared with its value before the income velocity and the money supply change