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

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If M decreases to $1 trillion and V remains constant at 5, then PY also decreases to $2.5 trillion. To maintain the equation, P must decrease to 1. Therefore, the correct answer is C. The decrease in M does not necessarily cause a change in velocity, so choices A, B, and D are incorrect.

If Initially the Money Supply Is $2 Trillion,velocity Is 5,the