Using the equation of exchange,if real output increases by 5 percent per year and velocity is stable,in order to keep the price level stable
A)The interest rate must increase by 5 percent per year.
B)Velocity must increase by 5 percent per year.
C)The money supply must increase by 5 percent per year.

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real output. If real output increases by 5 percent per year and velocity is stable, then PQ also increases by 5 percent per year. In order to keep the price level stable, M must increase by the same 5 percent per year to offset the increase in PQ. Therefore, option C is the correct choice. The interest rate and velocity are not related to the equation of exchange in this scenario.

Using the Equation of Exchange,if Real Output Increases by 5