Ceteris Paribus, What Would Happen to Real Money Balances If

question 48

Multiple Choice

Ceteris paribus, what would happen to real money balances if all prices, including input prices (incomes) and output prices, doubled tomorrow?

• A)Nominal money balances would double to 2M, the nominal price index would double to 2P, and real money balances would approximately double.
• B)Real money balances would double to 2M, the nominal price index would approximately triple to 3P, and nominal money balances would remain the same.
• C)Real money balances would double to 2M, the nominal price index would double to 2P, and the nominal money balances would double.
• D)Nominal money balances would remain the same, the overall price level would double to 2P, and real money balances would fall to one-half their previous amount, M/2P.

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