If the velocity of money is constant, then
A) a change in nominal GDP can be caused only by a change in the money supply.
B) a change in the money supply can be caused only by a change in the price level.
C) a change in the money supply is negatively related to a change in nominal GDP.
D) a change in the money supply would result in no change in nominal GDP.

Question

Quizplus · Accepted Answer

If the velocity of money is constant, then the following equation holds true: 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 goods and services produced).

Since V is assumed to be constant, a change in nominal GDP (PQ) can only occur if there is a change in M (the money supply). Therefore, choice A is correct. Choice B is incorrect because it implies that changes in the money supply are solely dependent on changes in the price level, which is not true. Choice C is also incorrect because it implies a negative relationship between changes in the money supply and nominal GDP, which is not necessarily true. Choice D is incorrect because, as explained above, a change in the money supply will result in a change in nominal GDP if the velocity of money is constant.

If the Velocity of Money Is Constant, Then