According to the equation of exchange, money supply can increase and real GDP can decrease at the same time if:

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. If M increases and Q decreases, then either V or P must decrease. However, if V falls rapidly enough, it can counteract the increase in M and lead to a decrease in Q despite the increase in M. Therefore, the correct answer is B, the velocity of money falls rapidly enough.

According to the Equation of Exchange, Money Supply Can Increase