Question 2:Theory of Money

2.Assume a hypothetical economy in which the velocity is constant at5and real GDPis always at a constant potential of $87,000billion. Suppose the money supply is $100,000billioninthe first year, $105,000 billion,in the second year, $110,000billionin the third year, and $120,000billionin thefourth year.(15 marks)

a.Using the equation ofquantity theory of money, compute the price level in each year.

b.Explain the relationship between money supply and inflation using this example.

c.Explain in whichperiod of time(recessionary or inflationary period) will this expansionary monetary policy help the economy be back to its potential level of real GDP? Why?