Assume that velocity and aggregate output are constant. if the money supply increases from $1.10 trillion to $1.14 trillion: a. aggregate output will increase by 2.73%. b. the price level will increase by 3.64%. c. the price level will increase by 2.73%. d. aggregate output will increase by 3.64%.

Option (B) is correct.

Explanation:

Money supply changes from $1.10 trillion to $1.14 trillion

Percentage increase in money supply =

                                                                = 3.636%

                                                                = 3.64% (approx.)

According to the quantity theory of money,

Money supply × Velocity = Price × output

Velocity and aggregate output is constant and if there is an increase in the money supply by 3.64% then as a result price level also increases by 3.64%.

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