If the money supply increases by10%, velocity decreases by 1%, and real GDP grows by 3%, then the price level

Question

Quizplus · Accepted Answer

Using 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 the real GDP, we can calculate the change in the price level. If the money supply increases by 10%, velocity decreases by 1%, and real GDP grows by 3%, the price level will increase by 6% to balance the equation, as the changes in money supply and velocity combined (10% - 1% = 9%) must equal the changes in price level and real GDP combined (P + 3%). Solving for P gives us a 6% increase in the price level.

If the Money Supply Increases By10%, Velocity Decreases by 1