A constant velocity of money in the quantity equation implies that any increase in the money supply will lead directly to:
A) an increase in the price level.
B) a decrease in real output.
C) an increase in real output.
D) a decrease in the price level.

Question

Quizplus · Accepted Answer

The quantity equation, MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is real output), implies that if V is constant and M increases, then either P must increase or Q must increase for the equation to balance. Assuming V is constant and the economy is at or near full capacity (meaning Q cannot increase significantly), an increase in M leads directly to an increase in P, which is the price level.

A Constant Velocity of Money in the Quantity Equation Implies