According to the assumptions of the quantity theory of money,if the money supply increases by 5 percent,then
A)nominal and real GDP would rise by 5 percent.
B)nominal GDP would rise by 5 percent;real GDP would be unchanged.
C)nominal GDP would be unchanged;real GDP would rise by 5 percent.
D)neither nominal GDP nor real GDP would change.

Question

Quizplus · Accepted Answer

The quantity theory of money assumes that the velocity of money and the economy's output are constant in the short run. Therefore, if the money supply increases by 5 percent (assuming velocity and output are constant), nominal GDP would rise by 5 percent, but real GDP would be unchanged since the increase in nominal GDP is solely due to the increased money supply.

According to the Assumptions of the Quantity Theory of Money,if