The equation of exchange indicates that if velocity is steady, then a rising money supply will cause:
A) per capita GDP to rise.
B) real GDP to fall.
C) nominal GDP to fall.
D) nominal GDP to rise.

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 real GDP. If velocity (V) is steady and the money supply (M) increases, then either P (price level) must increase, Q (real GDP) must increase, or both. Since the question specifies a rising money supply with steady velocity, it implies that nominal GDP (PQ) will rise, not necessarily per capita GDP or real GDP.

The Equation of Exchange Indicates That If Velocity Is Steady