If the money supply and the velocity of money are fixed, then increases in real GDP:
A) are impossible because real GDP must also be fixed.
B) cause increases in the price level.
C) cause decreases in the price level.
D) occur without changes in the price level.

Question

Quizplus · Accepted Answer

If the money supply and the velocity of money are fixed, an increase in real GDP would lead to a decrease in the price level, according to the equation of exchange (MV = PY), where M is the money supply, V is the velocity, P is the price level, and Y is real GDP. An increase in Y with constant M and V would require a decrease in P to maintain the equality.

If the Money Supply and the Velocity of Money Are