In the equation of exchange, an increase in M of 8 percent could be accompanied by changes in velocity, the price level and real GDP of:
A)-2%, 3%, 3%.
B)4%, 0%, 4%.
C)2%, 8%, 8%.
D)8%, 8%, 4%.

Question

In the equation of exchange, an increase in M of 8 percent could be accompanied by changes in velocity, the price level and real GDP of:​
A)​-2%, 3%, 3%.
B)​4%, 0%, 4%.
C)​2%, 8%, 8%.
D)​8%, 8%, 4%.

Quizplus · Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP. An 8% increase in M could be offset by a -2% change in V, and the remaining 10% increase (from the 8% increase in M and the -2% decrease in V) could be distributed as a 3% increase in P and a 3% increase in Q, maintaining the equality.

In the Equation of Exchange, an Increase in M of 8