Final answer:
If the central bank doubles the money supply from $50,000 to $100,000, prices are likely to increase due to inflation. Real GDP's reaction is uncertain, but nominal GDP will increase if all other factors remain constant. Thus, the correct answer is (b) 'Price will increase from $10 to $20'.
Step-by-step explanation:
When the central bank increases the quantity of money in circulation, this action can lead to different economic outcomes. If the central bank doubles the money supply from $50,000 to $100,000, the most likely immediate effect, according to the quantity theory of money, is that prices will increase. This is because more money chasing the same number of goods tends to lead to inflation, which means that the value of money falls and the prices rise.
Based on the information given about the stimulus effect of an $800 billion increase in the money supply when the velocity of money is 3, and the price level is expected to increase from 100 to 110, it suggests that the impact on the quantity of goods and services, or the real GDP, will be uncertain because the increased money supply will also lead to increased prices. However, if we strictly look at the nominal GDP using the quantity equation of money (MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the output or quantity of goods and services), a $100 billion increase in the money supply with a velocity of money at 3 would technically increase the nominal GDP by $300 billion.
In the given options, (b) 'Price will increase from $10 to $20' is the most likely correct answer for what will happen if a central bank increases the money supply, assuming that the velocity of money and the real output remain constant.