Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, how does the price level and nominal GDP change?
A) The price level and nominal GDP will not change.
B) The price level will not change but nominal GDP will grow by 10 percent.
C) The price level will decrease by 10 percent and nominal GDP will stay the same.
D) The price level and nominal GDP will increase by 10 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money (MV = PY), if velocity (V) and money supply (M) are constant, a 10% increase in real GDP (Y) would require the price level (P) to decrease by 10% to keep nominal GDP (PY) constant.

Assuming That Velocity Is Stable, If Real GDP Grows by 10