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

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that a change in the money supply directly affects nominal GDP in the same proportion, assuming velocity of money and real GDP are constant. Therefore, if the money supply decreases by 4 percent, nominal GDP would fall by 4 percent, but real GDP would remain unchanged.

According to the Assumptions of the Quantity Theory of Money