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

Question

Quizplus · Accepted Answer

The equation of exchange is MV=PY, where M is the quantity of money, V is velocity of circulation, P is the price level, and Y is real GDP. Rearranging this equation, we get P= MV/Y, which means that the price level is equal to velocity of circulation multiplied by the quantity of money divided by real GDP. Therefore, the correct choice is A.

The Equation of Exchange States That the Price Level Is