If velocity is constant in the long run, which of the following results flow from the quantity theory of money?
A) A change in the money supply changes real GDP by an equal percentage.
B) A change in the money supply changes nominal GDP by an equal percentage.
C) A change in the money supply changes real interest rates by an equal percentage.
D) A change in the money supply changes consumer lending by an equal percentage.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if velocity is constant in the long run, a change in the money supply will lead to an equal percentage change in nominal GDP. This is represented by the equation MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If V is constant, then an increase in M will lead to an equal increase in nominal GDP (PY) via the equation. Real GDP (Y) is held constant in this scenario. Therefore, choice B is the correct answer. None of the other options are predicted by the quantity theory of money when velocity is assumed to remain constant.

If Velocity Is Constant in the Long Run, Which of the Following