choose the answer below that is consistent with the following data: assume that velocity is 5, the quantity…

choose the answer below that is consistent with the following data: assume that velocity is 5, the quantity of output is 1,000 items, the price level is currently $10 and the federal reserve has created a total of $3,000. a) the fed is pursuing a contractionary monetary policy since the economy is in recession. b) this economy will suffer from an increase in the price level at some point in the future. c) this economy will suffer from higher than normal interest rates due to an excess of money supply. d) this economy will suffer from deflation due to an insufficiency of money for the size of the economy.

choose the answer below that is consistent with the following data: assume that velocity is 5, the quantity of output is 1,000 items, the price level is currently $10 and the federal reserve has created a total of $3,000. a) the fed is pursuing a contractionary monetary policy since the economy is in recession. b) this economy will suffer from an increase in the price level at some point in the future. c) this economy will suffer from higher than normal interest rates due to an excess of money supply. d) this economy will suffer from deflation due to an insufficiency of money for the size of the economy.

Answer

Explanation:

Step1: Apply the Quantity Theory of Money formula

The Quantity Theory of Money formula is ( MV = PY ), where ( M ) is the money supply, ( V ) is the velocity of money, ( P ) is the price level, and ( Y ) is the quantity of output. Given ( M = 3000 ), ( V = 5 ), ( Y=1000 ). Substitute into the formula: ( 3000\times5=P\times1000 ).

Step2: Solve for the equilibrium price level

From ( 3000\times5 = P\times1000 ), we can solve for ( P ). First, calculate ( 3000\times5=15000 ). Then ( P=\frac{15000}{1000}=15 ). The current price level ( P = 10 ). Since the equilibrium price level (( P = 15 )) is higher than the current price level, there will be an increase in the price level in the future.

Answer:

B. This economy will suffer from an increase in the price level at some point in the future.