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    Money supply and velocity

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    If the government increases the money supply by 50%, and the velocity of money and real GDP remain constant

    a) what percentage will the inflation tax be?
    b) what percentage increase or decrease will the value of real cash balances be?

    Please show steps and reasoning.

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    Solution Preview

    Using the equation MV = PQ, we see that in order to hold V and Q constant, inflation must rise by the same amount as M. For ...

    Solution Summary

    Application of the quantity theory of money to find the percentage change in inflation tax is provided in the solution.