Assuming that V is constant, the quantity equation implies that an increase in M could result in which of the following?
A)a decrease in the price level
B)an increase in real GDP
C)a decrease in nominal GDP
D)an increase in the price level

Question

Quizplus · Accepted Answer

According to the quantity equation, MV = PY where M = money supply, V = velocity of money, P = price level, and Y = real GDP. If V is constant, an increase in M would lead to an increase in PY, which means an increase in either P or Y or both. Since real GDP may remain constant in the short run, an increase in M would likely result in an increase in the price level (inflation), rather than an increase in real GDP. Therefore, option D is the correct answer.

Assuming That V Is Constant, the Quantity Equation Implies That