If the velocity of money is constant, then a 2% increase in the money supply
A) must be the result of a 2% increase in the price level.
B) would change nominal GDP by a smaller percentage.
C) would change nominal GDP by an equal percentage.
D) would change nominal GDP by a larger percentage.

Question

Quizplus · Accepted Answer

If the velocity of money is constant, then the equation of exchange is MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. If the money supply increases by 2%, then M increases by 2%. If V is constant, then the left side of the equation (MV) increases by 2%. In order to maintain the equality, the right side of the equation (PQ) must also increase by 2%. Therefore, the increase in nominal GDP (PQ) is equal to the increase in the money supply (M), meaning that the answer is C.

If the Velocity of Money Is Constant, Then a 2