The following data refers to a simple closed economy.

Money supply M= 200 million

General price level P = 10

Real output (ie real income) y = 100 units

Use the quantity theory of money to answer the following questions with the above figures as your starting point in each of your responses to parts (1) to (iv).

• What is the numerical value of the velocity of circulation?
• If the money supply were increased to 300 million, according to the quantity theory of money what would be the value of the general price level?
• If real output were to fall from 100 units to 50 units, according to the quantity theory of money what would be the value of the general price level?
• If real output increased by 4%, what would be the required money supply to maintain stable prices?
• In the quantity theory of money, does causation run from prices to money or from money to prices? What assumptions are made about the velocity of circulation?