According to the equation of exchange, if velocity and real GDP do not change, a 3 percent increase in the quantity of money
A) raises the price level by 3 percent.
B) raises the price level by 3 ÷ (velocity).
C) lowers the price level by 3 ÷ (real GDP).
D) lowers the price level by 3 percent.
E) raises the price level by less than 3 percent.

Question

Quizplus · Accepted Answer

According to the equation of exchange: MV = PQ, where M is the quantity of money, V is velocity, P is the price level, and Q is real GDP. If velocity and real GDP do not change, then we can rewrite the equation as: M = (PQ)/V. Since Q and V are constant, a 3 percent increase in M will lead to a 3 percent increase in P.

According to the Equation of Exchange, If Velocity and Real