Suppose the money supply increases by 10 percent but velocity is not constant. Given this information, it follows that:
A)nominal GDP will increase by 10 percent.
B)nominal GDP will increase by less than 10 percent.
C)nominal GDP will increase by more than 10 percent.
D)the change in nominal GDP cannot be determined.

Question

Quizplus · Accepted Answer

The change in nominal GDP cannot be determined without knowing how the velocity of money changes. The quantity equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP) shows that if V is not constant, the effect on nominal GDP (PQ) from a change in M cannot be precisely determined without additional information.

Suppose the Money Supply Increases by 10 Percent but Velocity