If the money supply increased by 4 percent and velocity increased by 4 percent:

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 the quantity of goods and services produced (real GDP), an increase in either the money supply (M) or the velocity of money (V) would lead to an increase in the nominal GDP (PQ). If both the money supply and velocity increase by 4 percent, their combined effect would lead to an 8 percent increase in nominal GDP, assuming the equation holds true in the short run and other factors remain constant.

If the Money Supply Increased by 4 Percent and Velocity