Assume that you are one of six thousand people who live in the small island of T
ID: 1157649 • Letter: A
Question
Assume that you are one of six thousand people who live in the small island of Tap. This island is small and can only produce maximum of six thousand bags of corn a year. The six thousand bags of corn produced are just enough for the residents since each resident only earns enough to buy one bag of corn a year. The currency on Tap is the US dollar. Now suppose that the government of Tap injects more US dollars into the economy, and the result is that person now ends up having twice the amount of US dollars as he or she did before. Make a logical prediction about prices of corn in the economy, and explain what principle of economics is illustrated in this scenario.Explanation / Answer
Ans
According to quantity theory of money prices will double as nominal income has doubled. This shows that money is neutral in effect and that real variables can't be influenced by it. We need to increase supply to increase consumption rn consumption