ScholarMatic: Explanation & Answer
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Lesson 2 Examples
Example 2.1 – The Quantity Theory of Money
Assume the quantity theory of money holds while answering this question.
Suppose the money supply is 200, real output is 1000, and the price per unit is 2.
a. What is the value of velocity?
b. If velocity is fixed at the value you solved for in part a, what does the quantity theory of
money suggest will happen if the money supply is increased to 400? Does this depend on
any assumptions about the economy as a whole?
money suggest will happen if the money supply is increased to 400? Does this depend on
any assumptions about the economy as a whole?
c. Is your answer in part b consistent with the classical dichotomy? Explain.
Example 2.2 – The Money Multiplier
In the economy, the following statistics describe the money supply:
C = 1000
RR = 200
ER = 50
D = 1750
Given these data, calculate the following:
a. MB b. M c. rr d. c e. e f. mm
In the economy, the following statistics describe the money supply:
C = 1000
RR = 200
ER = 50
D = 1750
Given these data, calculate the following:
a. MB b. M c. rr d. c e. e f. mm
ScholarMatic: Explanation & Answer
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