If the velocity of money increases from 5 percent and real GDP increases 3 percent,what will the Bank of Canada need to do keep prices the same?

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M represents the money supply, V represents the velocity of money, P represents the price level, and Y represents real GDP. If V increases by 5% and Y increases by 3%, then PY will increase by 8%. In order to keep P stable, the Bank of Canada would need to decrease M by the same amount, which is 8% of the initial money supply, or 2% of the new money supply. Therefore, the correct answer is B.

If the Velocity of Money Increases from 5 Percent and Real