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

Question

Quizplus · Accepted Answer

The equation of exchange, also known as the quantity theory of money, states that the money supply multiplied by the velocity of circulation (the number of times that money is spent during a given period) equals nominal GDP (the total value of all final goods and services produced in an economy). This can be written as M x V = P x Y, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. Therefore, the correct answer is (D) multiplied by the velocity of circulation equals nominal GDP.

The Equation of Exchange States That the Quantity of Money