If initially the money supply is $1 trillion,velocity is 5,the price level is 1,and real GDP is $5 trillion,an increase in the money supply to $2 trillion
A)increases real GDP to $10 trillion.
B)causes velocity to fall to 2.5.
C)increases the price level to 2.
D)increases the price level to 2 and velocity to 10.

Question

Quizplus · Accepted Answer

The equation of exchange in economics, given by 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, can be used to understand the impact of changing the money supply. Initially, M = $1 trillion, V = 5, P = 1, and Q = $5 trillion. When M increases to $2 trillion, and assuming V and Q remain constant, the only variable that can adjust to maintain the equality is P, the price level. Doubling M from $1 trillion to $2 trillion, with V and Q constant, necessitates that P doubles to maintain the equation's balance, making the price level increase to 2.

If Initially the Money Supply Is $1 Trillion,velocity Is 5,the