Suppose that M increases by 5 percent while the velocity of money is constant. The quantity theory of money predicts that
A) nominal GDP will rise by 5 percent.
B) the price level will fall by 5 percent.
C) the quantity of output will fall by 5 percent.
D) nominal GDP will remain unchanged.
E) nominal GDP will fall by 5 percent.

Question

Quizplus · Accepted Answer

The quantity theory of money states that 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. If M increases by 5 percent and V is constant, then PQ (nominal GDP) must also increase by 5 percent to maintain the balance of the equation. Therefore, choice A is the correct answer.

Suppose That M Increases by 5 Percent While the Velocity