If the price level doubles,

Question

a. the quantity demanded of money falls by half.
b. the money supply has been cut by half.
c. nominal income is unaffected.
d. the value of money has been cut by half.
e. none of the above is true.

Answer 1

To analyze the statements given the condition that the price level doubles, we can go through them one by one:

a. The quantity demanded of money falls by half.
This statement is not necessarily true. The quantity demanded of money is related to the nominal income and the price level, but it does not imply that it will simply fall by half if the price level doubles.

b. The money supply has been cut by half.
This statement is also not true. The money supply is not inherently affected just because the price level doubles; it remains unchanged unless specifically altered by monetary policy.

c. Nominal income is unaffected.
This statement is typically false if we consider the quantity theory of money, which states that an increase in the price level can result from an increase in money supply or a change in real output. While nominal income could theoretically remain unchanged depending on specific economic conditions, it is more likely that it would be affected alongside the change in price level.

d. The value of money has been cut by half.
This statement is closest to being true. If the price level doubles, it implies that the value of money has halved because the purchasing power of money is inversely related to the price level.

e. None of the above is true.
This is not correct because statement (d) is true.

Taking all this into account, the most accurate option is:

d. the value of money has been cut by half.