Suppose real output and velocity are stable and predictable.What simple relationship can be derived by the equation of exchange?
A) a relationship between the money supply and the price level
B) a relationship between the money supply and the interest rate
C) a relationship between the money supply and the foreign exchange rate
D) a relationship between velocity and real GDP

Question

Suppose real output and velocity are stable and predictable.What simple relationship can be derived by the equation of exchange?  
A) a relationship between the money supply and the price level 
B) a relationship between the money supply and the interest rate 
C) a relationship between the money supply and the foreign exchange rate 
D) a relationship between velocity and real GDP

Quizplus · Accepted Answer

The equation of exchange (M x V = P x Y) shows a direct relationship between the money supply (M) and the price level (P), assuming that velocity (V) and real output (Y) are stable and predictable. Therefore, a simple relationship that can be derived from the equation of exchange is the one between the money supply and the price level.

Suppose Real Output and Velocity Are Stable and Predictable