Assume nominal GDP = PY, and = the proportion of nominal income that the nation holds (demands) as money to cover its transactions. Because nominal money supply equals nominal money demand, then: A) increases in nominal income cause an increase in the money supply. B) decreases in nominal income cause an increase in the money supply. C) price increases cause an increase in the money supply. D) an increase in the money supply causes a proportional increase in nominal income.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, nominal income (PY) is directly proportional to the money supply (M), which means that an increase in nominal income causes an increase in the money supply. This is because the proportion of nominal income that is held as money () is fixed in the short run, and if nominal income increases, the money supply must also increase in order to maintain the fixed proportion.

Assume Nominal GDP = PY, and =