If velocity remains relatively constant, changes in the money supply can have a predictable effect on nominal GDP.

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is velocity, P is price level, and Q is real GDP. If velocity remains constant, an increase in M will result in an equivalent increase in PQ, or nominal GDP. Likewise, a decrease in M will result in a decrease in PQ, or nominal GDP.

If Velocity Remains Relatively Constant, Changes in the Money Supply