The equation of exchange is given by M x V = P x Q, where M is the money supply, V is the velocity of money, P is the economy's price level, and is Real GDP. Suppose the following diagram shows the current aggregate demand (AD) and aggregate supply (AS) curves in a hypothetical economy. 18 AS 15 PRICE LEVEL 3 0 0 3 6 9 12 REAL GDP (Trillions of dollars) AD 15 18 AD AS What is the GDP of this economy? $54 trillion $162 trillion $108 trillion $81 trillion If the velocity of money is 2, the money supply in this economy is Adjust the previous graph to show the effects of a decrease in the Based on the new price level, what must the new money supply be $54 trillion $27 trillion $13.5 trillion $67.5 trillion $40.5 trillion $54 trillion $4.5 trillion $81 trillion $27 trillion if the ve Adjust the previous graph to show the effects of a decrease in the money supply. Based on the new price level, what must the new money supply be in the long run if the velocity of money remains at 2? $54 trillion $27 trillion $13.5 trillion $33.75 trillion the Federal Reserve controls M velocity is assumed to be constant the AD curve is downward sloping Because money supply. This illustrates the the percentage decrease in the price level is the percentage decrease in the $27 trillion $13.5 trillion $33.75 trillion Because money supply. This illustrates the , the percentage decrease in the price level is greater than the same as less than the percentage decrease in the $13.5 trillion $33.75 trillion Because money supply. This illustrates the fact that monetary policy can increase Real GDP simple quantity theory of money importance of the Federal Reserve price level is the percentage decrease in the