If the real GDP increases by 4%, the Price level decreases by 1%, and velocity increases by 6%, then, which is the change in the money supply is _____percent

To answer this question, we need to use the Quantity Theory of Money, which is expressed in the equation MV = PY.

Here, M stands for the money supply, V stands for velocity of money (how quickly money changes hands), P stands for the price level, and Y stands for real GDP.

Step 1: Understand the terms

• Real GDP (Y) has increased by 4%.
• The Price level (P) has decreased by 1%.
• Velocity (V) has increased by 6%.

Step 2: Calculate the change in PY The change in PY (the product of the price level and real GDP) is the sum of the percentage changes in P and Y. So, -1% (change in P) + 4% (change in Y) = 3%.

Step 3: Calculate the change in MV The change in MV (the product of the money supply and velocity) is the sum of the percentage changes in M and V. We know the change in V is 6%, but we don't know the change in M (the money supply), which is what we're trying to find.

Step 4: Set the change in PY equal to the change in MV According to the Quantity Theory of Money, the percentage change in PY should equal the percentage change in MV. So, we can set up the equation 3% (change in PY) = 6% (change in V) + X% (change in M).

Step 5: Solve for X Subtract 6% from both sides of the equation to solve for X: 3% - 6% = X. So, X = -3%.

Step 6: Interpret the result The change in the money supply is -3%. This means the money supply has decreased by 3%.