Answer to Question #110756 in Microeconomics for Qudrat Ullah

Question

Q2: Suppose that when everyone wakes up tomorrow, they discover that the government has given them an additional amount of money equal to the amount they already had. Explain what effect this doubling of the money supply will likely have on the following:

a. the total amount spent on goods and services

b. the quantity of goods and services purchased if prices are sticky

c. the prices of goods and services if prices can adjust

Answer 1

The total amount spent on goods and services

Amount spent will increase since people will purchase more because they have money to spend.

The quantity of goods and services purchased if prices are sticky

There will be more goods in terms of quantity but the cost will be low since there will be more goods hence low demand

The prices of goods and services if prices can adjust

Since people will have money to purchase the goods. The price of the goods will be high because of an increase in the demand.