According to the quantity equation, a reduction in the velocity of money, all else fixed, will tend to cause:
A) a reduction in the money supply.
B) an increase in nominal GDP.
C) a reduction in nominal GDP.
D) an increase in the money supply.

Question

Quizplus · Accepted Answer

The quantity equation is MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If V decreases, and all else is held constant, then PY must also decrease. This means nominal GDP, PY, will decrease. Choice A is incorrect because a decrease in velocity would not cause a reduction in the money supply. Choice B is incorrect because a decrease in velocity results in a decrease in nominal GDP rather than an increase. Choice D is incorrect for the same reason as choice A, a decrease in velocity would not translate into an increase in the money supply.

According to the Quantity Equation, a Reduction in the Velocity