Assume the money supply is $800, the velocity of money is 8, and the price level is 2. Using the quantity theory of money: a. Determine the level of real output. $ b. Determine the level of nominal output. $ c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent

a. Real output = 3200

b. The nominal output  = 6400

c. The real output increases with an increase in 20% money supply.

Explanation:

Money supply = $800

Velocity = 8

The price level = 2

The quantity theory is as follows:

Money supply × Velocity = Price level  × Real output

800  × 8 = 2  × Real ouput

Real output = 3200

b. the nominal output = Price level  × Real output

the nominal output = 2 × 3200 = 6400

c. the rise in money supply = 800 × 20% = 160

new money supply = 800 +160 = 960

Money supply × Velocity = Price level  × Real output

960  × 8 = 2  × Real ouput

Real output = 3840

The real output increases with an increase in 20% money supply.

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