Question

If initially the money supply is​ $1 trillion, velocity is​ 5, the price level is​ 1, and real GDP is​ $5 trillion, an increase in the money supply to​ $2 trillion A. increases real GDP to​ $10 trillion. B. causes velocity to fall to 2.5. C. increases the price level to 2. D. increases the price level to 2 and velocity to 10.

Answer 1

Answer: Option (B) is correct.

Step-by-step explanation:

Given that,

Initially:

Money supply =​ $1 trillion

Velocity =​ 5

Price level =​ 1

Real GDP =​ $5 trillion

If money supply increases to $2 trillion

Velocity of money =
`(Price * GDP)/(Money\ Supply)`

Velocity of money =
`(1 * 5)/(2)`

= 2.5

Therefore, an increase in the money supply to​ $2 trillion causes velocity to fall to 2.5.