According to the equation of exchange, the long-run effect of a doubling of the money supply would be that
A) both prices and real GDP double.
B) the economy grows with little inflation.
C) the price level is halved and real GDP doubles.
D) prices double and real GDP is unchanged.

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. If the money supply (M) doubles and velocity (V) remains constant, then P (price level) will also double in the long run (assuming no changes in Y). Therefore, real GDP (Y) will remain unchanged while prices (P) double. Therefore, option D is the correct answer.

According to the Equation of Exchange, the Long-Run Effect of a Doubling