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Price level is fixed & Fed increases money supply by 10% to $2.2 trillionHow much...

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ccisme | Student, Undergraduate | eNoter

Posted November 25, 2012 at 8:17 PM via web

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Price level is fixed & Fed increases money supply by 10% to $2.2 trillion

How much does the GDP increase or decrease?

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apushstudent | Student , Grade 10 | eNoter

Posted January 15, 2013 at 3:43 AM (Answer #1)

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The quantity theory of money states that:

Money supply*Money velocity = Price Level*Quantity

Price level*Quantity = real GDP

Therefore, assuming that the price level is fixed and the money velocity is fixed, real GDP will increase by 0.2 trillion or $200 billion.  Here is the math:

2.2 trill / 1.1 = 2 trill (how much we started with)

2.2 trill - 2 trill = 0.2 trillion

Sources:

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