Consider the quantity equation M x V = P x Y, where M is the quantity of money, V is the velocity of money, P is the average price of goods and services, and Y is the level of real output of goods and services. Suppose the following conditions hold:

Velocity is fixed.

The factors of production and the production function determine the level of output.

Suppose that the Federal Reserve unexpectedly decides that it wants to increase the money supply for 5%. According to the quantity theory of money, which of the following results will occur? Choose all that apply.

a. Inflation will be equal to 5%.

b. Prices will remain the same.

c. Nominal GDP will increase by more than 5%.

d. Nominal GDP will increase by 5%.

Suppose that when you took out a mortgage for your home purchase 10 years ago, expected inflation was only 3%. Because the actual inflation rate was _____

a. lower

b. higher

than expected, this hurts _____.

Answer rating: 100% (QA)

a As the money supply has increased by 4that will increase the nominal GDP ie PY by 4 and the in... View the full answer