Suppose that monetary neutrality holds and that velocity is constant.A 5% increase in the money supply

Question

Quizplus · Accepted Answer

If monetary neutrality holds and velocity is constant, then the equation of exchange, MV=PY, holds true. If we assume that Y (real GDP) is also constant in the short run, then a 5% increase in M (money supply) will lead to a 5% increase in P (price level), as V (velocity) is constant. Therefore, the correct option is B, as it states that the increase in the money supply will increase the price level by exactly 5%.

Suppose That Monetary Neutrality Holds and That Velocity Is Constant