According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level:
A)decreases by 5 percent.
B)decreases by more than 5 percent.
C)increases by more than 5 percent.
D)increases by 5 percent.

Question

Quizplus · Accepted Answer

The Quantity Equation says: P × Y = M × V. In this case, if M goes up by 5 percent then then P × Y must also go up 5 percent. Since Y is constant, P must go up by 5 percent.

According to the Quantity Equation, If Velocity and Real GDP