According to the equation of exchange, the
A) quantity of money multiplied by the inflation rate equals nominal GDP.
B) velocity of circulation is always smaller than the inflation rate.
C) quantity of money divided by the inflation rate equals real GDP.
D) quantity of money multiplied by the velocity of circulation equals nominal GDP.
E) quantity of money minus the velocity of circulation equals real GDP minus the price level.

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ where M is the quantity of money, V is the velocity of circulation, P is the price level and Q is real GDP. Solving for nominal GDP by rearranging the equation, we get MV = PQ = nominal GDP, which means that the quantity of money multiplied by the velocity of circulation equals nominal GDP.

According to the Equation of Exchange, the