Suppose the money supply tripled, but at the same time velocity fell by half and real GDP was unchanged. According to the quantity equation the price level
A)is 1.5 times its old value.
B)is 3 times its old value.
C)is 6 times its old value.
D)is the same as its old value.

Question

Quizplus · Accepted Answer

The quantity equation is MV = PY. If the money supply (M) triples and velocity (V) falls by half, then MV is 1.5 times its original value. Since real GDP (Y) is unchanged, the price level (P) must be 1.5 times its old value to maintain the equation balance.

Suppose the Money Supply Tripled, but at the Same Time