Question

Need rn! Due to a change in monetary policy, the money supply in a certain country is reduced. Bob says that this will likely lead to a decrease in the velocity of money and an increase in the average price level of goods. Is Bob correct?

a.) Bob is not correct. The money supply and the velocity of money always change in opposite ways.

b.) Bob is correct. The money supply and the velocity of money always change in the same way as each other, which will be the opposite of the change to the average price of goods.

c.) Bob is not correct. If both the money supply and the velocity of money decreased, the average price level of goods would likely decrease as well.

d.) Bob is not correct. The money supply, the velocity of money, and the average price level of goods always change in the same way as each other.

Answer 1

Bob is not correct. The correct answer is (c): If both the money supply and the velocity of money decreased, the average price level of goods would likely decrease as well. When the money supply is reduced, it is likely that the velocity of money will also decrease. This means that people will be spending less money and the economy will slow down, which can lead to a decrease in the average price level of goods due to decreased demand.