According to the quantity equation, which of the following best describes the effects of an increase in the money supply?
A)If velocity is stable, an increase in the money supply creates a proportional increase in nominal GDP but not in the price level.
B)If velocity is stable, an increase in the money supply creates a proportional increase in the price level and real GDP.
C)If velocity is stable, an increase in the money supply creates an increase in the real GDP but not in the price level.
D)With constant money supply and velocity, an increase in the money supply creates a proportional increase in the price level and nominal GDP

Question

Quizplus · Accepted Answer

According to the quantity equation, MV=PY, an increase in the money supply (M) with constant velocity (V) will result in a proportional increase in nominal GDP (PY). Therefore, with constant velocity and increasing money supply, the only possible outcome is a proportional increase in both the price level (P) and nominal GDP (Y). Real GDP (Y) is determined by factors such as technology, labor, and capital, and is not directly affected by changes in the money supply. Therefore, option D is the correct answer.

According to the Quantity Equation, Which of the Following Best