According to the assumptions of the quantity theory of money, if the money supply increases by 4 percent, then
A)nominal and real GDP would rise by 0.40 percent.
B)nominal GDP would rise by 4 percent; real GDP would be unchanged.
C)nominal GDP would be unchanged; real GDP would rise by 4 percent.
D)neither nominal GDP nor real GDP would change.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that an increase in the money supply will directly increase nominal GDP by the same percentage, assuming velocity of money and real output (real GDP) remain constant. Therefore, if the money supply increases by 4 percent, nominal GDP would also increase by 4 percent, but real GDP would remain unchanged because the increase in nominal GDP is attributed to inflation rather than an increase in physical output.

According to the Assumptions of the Quantity Theory of Money