b). In the short run equilibrium real GDP increases by more than the same amount as the increase in the quantity of real GDP demanded.
c). In the long run equilibrium real GDP doesn’t change.
d). In the short run the price level would rise.
e). In the long run the price level would rise.
a). see attached pages
The graph confirms the quantity theory of money, which proposes that in the long run, the increase in the quantity of money brings an equal percentage increase in the price level, which is a reflection of inflation. Using the growth rate of M2+ as the money growth rate, one can see that generally, the inflation rate followed the same trend. However, between 1986 and 1991, the inflation rate does not follow the trend of the money growth rate since the correlation is not exact.
b). see attached pages
The velocity of money over this period gradually increased because of technological advancements that create new ways of transactions (i.e. debit cards). Inflation is proportionate to the money growth rate and the change in velocity. Since the money growth rate has generally decreased over the period while the velocity has generally increased over the same period, the inflation rate remains stable.