Solution-Quantity theory of money, According to the

Quantity theory of money

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According to classical macroeconomic theory, money supply shocks are "neutral."

a. Explain what this means. Hint: see 5.7 of the textbook.

b. Based on that theory, how would a 5% increase in a nation's money supply affect its realwage rate (W/P), all else equal (up, down, or no change, and by how much)?

c. According to the quantity theory of money, how would a 5% increase in the money supplyaffect the price of goods and services (P), all else equal (up, down, or no change, and byhow much)?

d. To be consistent with both theories, what would have to happen to the nominal wage rate(W)? Explain.

Reference no: EM131423720

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Quantity theory of money

Reference no: EM131423720

Reference no: EM131423720

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