Question

Suppose monetary neutrality holds and velocity is constant. A 5 percent increase in the money supply increases the price level by less than 5 percent. increases the price level by more than 5 percent. increases the price level by 5 percent. does not change the price level.

Answer 1

Answer: Increases the price level by 5 percent

Step-by-step explanation:

Monetary Neutrality is a theory in Economics that posits that when there is a change in money supply in an economy, the only variables affected are the nominal ones like price level and wages and Real variables like GDP and employment are not affected.

It holds that when there is an increase in money supply, there is an equivalent increase in Price level as well because the value of money has fallen by the rate of the monetary increase. The Price level rising at the same rate is to compensate.

A 5 percent increase in the money supply will therefore increase the price level by 5 percent.