Holding the velocity of money constant,according to the equation of exchange,a 10 percent increase in the money supply could possibly cause which of the following?

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output. Holding V constant, a 10 percent increase in M would lead to a 10 percent increase in PQ. Assuming no changes in Q, this would result in a 10 percent increase in P. Therefore, the correct answer is D, a 10 percent increase in the price level.

Holding the Velocity of Money Constant,according to the Equation of Exchange,a