According to the quantity equation, if velocity is constant at 2.5 and real GDP is constant at 8000, then, if the money supply is increased from 4800 to 5280, the price level:
A)increases to 1.1
B)increases to 1.5
C)increases to 1.65
D)is constant at 1.5

Question

Quizplus · Accepted Answer

The quantity equation is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. If velocity and real GDP are constant, then an increase in the money supply will lead to an increase in the price level. In this case, the money supply increases from 4800 to 5280, so the price level will increase by 5280/4800 = 1.1.

According to the Quantity Equation, If Velocity Is Constant at 2.5