Suppose there is an increase in the money supply, with velocity and real GDP constant.According to the equation of exchange, which of the following variables will likely increase?
A) net exports
B) the price level
C) interest rates
D) the value of Canadian dollar

Question

Suppose there is an increase in the money supply, with velocity and real GDP constant.According to the equation of exchange, which of the following variables will likely increase?  
A) net exports 
B) the price level 
C) interest rates 
D) the value of Canadian dollar

Quizplus · Accepted Answer

According to the equation of exchange, an increase in the money supply when velocity and real GDP are constant leads to an increase in the price level. Therefore, the correct answer is B. The other options, net exports (A), interest rates (C) and the value of the Canadian dollar (D) are not directly affected by changes in the money supply in the short run when velocity and real GDP are constant.

Suppose There Is an Increase in the Money Supply, with Velocity