VIPSolutionsrewrite and Give step-by-step solution with explanation and final answer:‘Assuma that the quantity theory of money holds and that velocity is constant at 5. Output i fixed atts full employment value of 18,000, and the prioteva 0.80 [Er re— | Root domand or money: [7] enor your rspons os an regen Nominal demand for money: (enter your response as an integer) is samo aconomy th governmont x0 the nominal money suppl a 7,500With cut fxd at sfl-ermploymant evel and with he lon tht pices ar file what wl ba ha new pric vel? 1] (onto your rspons as docml rondo 10 two decimal lacs) if Hl
Question:
rewrite and Give step-by-step solution with explanation and final answer:
‘Assuma that the quantity theory of money holds and that velocity is constant at 5. Output i fixed atts full employment value of 18,000, and the
prioteva 0.80
[Er re—
| Root domand or money: [7] enor your rspons os an regen
Nominal demand for money: (enter your response as an integer)
is samo aconomy th governmont x0 the nominal money suppl a 7,500With cut fxd at sfl-ermploymant evel and with he
lon tht pices ar file what wl ba ha new pric vel?
1] (onto your rspons as docml rondo 10 two decimal lacs)
if
Hl
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Asked by: mohit
Created at: 2025-09-21 17:02:04
Asked by: mohit
Created at: 2025-09-21 17:02:04
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Let's solve the problem step by step:
---
## Given Data
- **Velocity of money (V):** 6
- **Output (Y):** 18,000
- **Price level (P):** 0.80
The **Quantity Theory of Money** equation is:
\[
MV = PY
\]
Where:
- \( M \) = Nominal money supply (or nominal demand for money at equilibrium)
- \( V \) = Velocity of money
- \( P \) = Price level
- \( Y \) = Output (real GDP)
---
## a. Determine the following:
### 1. **Real demand for money**
Real demand for money (\( \frac{M}{P} \)) is the amount of money people want to hold in terms of goods and services.
\[
\text{Real demand for money} = \frac{Y}{V}
\]
\[
\frac{18,000}{6} = 3,000
\]
**Answer:** Real demand for money = **3,000**
---
### 2. **Nominal demand for money**
Nominal demand for money (\( M \)) is:
\[
M = P \times Y / V
\]
But since \( MV = PY \), at equilibrium:
\[
M = \frac{PY}{V}
\]
or simply:
\[
M = \text{Real demand for money} \times P
\]
But let's use \( M = \frac{PY}{V} \):
\[
M = \frac{0.80 \times 18,000}{6} = \frac{14,400}{6} = 2,400
\]
**Answer:** Nominal demand for money = **2,400**
---
## b. New price level if nominal money supply is 7,500
Given:
- New \( M = 7,500 \)
- \( V = 6 \)
- \( Y = 18,000 \)
Using \( MV = PY \):
\[
7,500 \times 6 = P \times 18,000
\]
\[
45,000 = 18,000P
\]
\[
P = \frac{45,000}{18,000} = 2.50
\]
**Final Answer:** \( P = \mathbf{2.50} \)
---
## **Summary Table**
| Item | Calculation | Value |
|-----------------------------|------------------------------|----------|
| Real demand for money | \( 18,000 / 6 \) | 3,000 |
| Nominal demand for money | \( 0.80 \times 18,000 / 6 \) | 2,400 |
| New Price Level (P) | \( 7,500 \times 6 / 18,000 \) | 2.50 |
---
### **Final Answers**
- **Real demand for money:** 3,000
- **Nominal demand for money:** 2,400
- **New price level (P):** 2.50
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