According to the equation of exchange,if the quantity of money decreases and the velocity of money remains constant,then
A) the level of real GDP must decrease.
B) the level of nominal GDP must decrease.
C) the price level must decrease.
D) the level of inflation must increase.

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output. If the quantity of money decreases while the velocity of money remains constant, then M decreases. Therefore, at constant levels of V, P, and Q, MV must decrease. Since MV = PQ, then a decrease in M will lead to a decrease in PQ, which means that the level of nominal GDP must decrease (option B).

According to the Equation of Exchange,if the Quantity of Money