Suppose Y = 100, P = 80, and V = 3.2. If Y rises to 105, and the infla

Suppose Y = 100, P = 80, and V = 3.2. If Y rises to 105, and the inflation rate is 10 percent, what is the new value of M?

What will be an ideal response?

ANSWER

105 × 88 = 9,240 = M × 3.2. M = 2,887.5. Equivalently, 100 × 80 = M × 3.2, so M = 2,500. Since P × Y rises from 8,000 to 9,240, an increase of 15.5%, M must rise by 15.5% = 2,500 × 1.155 = 2,887.5