According to the quantity equation, if velocity and real GDP are constant and the Reserve Bank increases the money supply by five per cent, then the price level
A)decreases by 10 per cent
B)decreases by five per cent
C)is also constant
D)increases by five percent

Question

Quizplus · Accepted Answer

According to the quantity equation, MV=PQ. Velocity (V) and real GDP (Q) are constant, and the Reserve Bank increases the money supply by five per cent (M+5%). Therefore, if we assume that there is no change in velocity or real GDP, then a five per cent increase in M leads to a five per cent increase in nominal GDP (PQ). Therefore, the price level (P) must increase by five per cent to accommodate the increase in the money supply.

According to the Quantity Equation, If Velocity and Real GDP