In the equation of exchange, if the velocity of money is constant, a 10 percent increase in the money supply must:
A)increase the price level by 10 percent.
B)result in a higher level of unemployment.
C)increase real GDP by 10 percent.
D)increase nominal GDP by 10 percent.

Question

Quizplus · Accepted Answer

The equation of exchange is 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. If V is constant and M increases by 10 percent, then the product of PQ, which is nominal GDP, must also increase by 10 percent to maintain the equality, assuming V is constant and there are no immediate changes in Q (real GDP).

In the Equation of Exchange, If the Velocity of Money