Use the figure below to answer the following question.

Figure 28.2.4
-Refer to Figure 28.2.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level?
A)100
B)120
C)130
D)150
E)We cannot tell without more information on wage negotiations.

Question

Use the figure below to answer the following question.
  
Figure 28.2.4
-Refer to Figure 28.2.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level?
A)100 
B)120 
C)130 
D)150 
E)We cannot tell without more information on wage negotiations.

Quizplus · Accepted Answer

According to the quantity theory of money, if the money supply increases by 50%, the price level is expected to increase by the same percentage, assuming velocity and output remain constant. Thus, if the initial price level is 100, a 50% increase would result in a price level of 150.

Use the Figure Below to Answer the Following Question