Question

assume that the velocity of money in theopolis is 3 and the aggregate supply curve is vertical at $100 million. what impact will a 10% increase in the money supply have on real output? choose 1 answer: a real output will increase by 3% b real output will increase by 10% c real output will increase by $\frac{3}{10%}$ d real output will increase by 30% e there will be no impact on real output

Explanation:

Step1: Recall quantity - theory of money

The quantity - theory of money is given by the equation $MV = PY$, where $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $Y$ is real output. When the aggregate supply curve is vertical, it implies that the economy is at full - employment and real output $Y$ is fixed in the short - run.

Step2: Analyze the effect of money supply change

An increase in the money supply $M$ will not affect real output $Y$ because the vertical aggregate supply curve means that real output is determined by real factors (such as technology, labor force, and capital stock) and not by the quantity of money. A 10% increase in the money supply will only lead to an increase in the price level $P$ to maintain the equality $MV = PY$ since $V$ is constant and $Y$ is fixed.

Answer:

E. There will be no impact on real output