The equation of exchange states that the price level is equal to
A) the velocity of circulation.
B) real GDP multiplied by the velocity of circulation divided by nominal GDP.
C) the money supply.
D) velocity of circulation multiplied by the money supply divided by real GDP.

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is the real output. By rearranging the equation, we can see that P = (MV)/Q. This means that the price level is equal to the velocity of circulation multiplied by the money supply divided by real GDP, which corresponds to answer choice D.

The Equation of Exchange States That the Price Level Is