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

Question

Quizplus · Accepted Answer

The equation of exchange is represented as MV = PQ, where M is the quantity of money, V is the velocity of circulation (how fast money changes hands), P is the price level, and Q is the real GDP. When rearranged to reflect nominal GDP (PQ), it shows that the quantity of money (M) multiplied by the velocity of circulation (V) equals nominal GDP.

The Equation of Exchange States That the Quantity of Money