The equation of exchange indicates that if velocity is steady, then a decreasing money supply will cause:
A) per capita GDP to fall.
B) real GDP to rise.
C) nominal GDP to fall.
D) nominal GDP to rise.

Question

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 real GDP. If velocity (V) is steady and the money supply (M) decreases, then either P (price level) must decrease, Q (real GDP) must decrease, or both, to keep the equation balanced. This leads to a decrease in nominal GDP (PQ), as nominal GDP is the product of the price level and real GDP.

The Equation of Exchange Indicates That If Velocity Is Steady