Figure 16-2

Multiple Choice

Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.

-Refer to Figure 16-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct? When P = P₂,

A) investment is lower than it is when P = P₁.
B) nominal output is higher than it is when P = P_1.
C) the expected rate of inflation is higher than it is when P = P₁.
D) the velocity of money is higher than it is when P = P₁.