Suppose the economy's velocity is constant and the same level of real output is produced year after year.What would be the result of a slow increase in the money supply?
A) a slowly increasing price level
B) a rapidly increasing price level
C) a slowly increasing real GDP
D) a rapidly increasing real GDP

Question

Suppose the economy's velocity is constant and the same level of real output is produced year after year.What would be the result of a slow increase in the money supply?  
A) a slowly increasing price level 
B) a rapidly increasing price level 
C) a slowly increasing real GDP 
D) a rapidly increasing real GDP

Quizplus · Accepted Answer

A slow increase in the money supply with constant velocity and the same level of output will likely lead to a slowly increasing price level due to the quantity theory of money, which states that the price level is directly proportional to the amount of money in circulation. Real GDP would not be affected as there is no change in output. A rapid increase in the money supply would lead to a rapidly increasing price level and could potentially lead to an increase in real GDP if accompanied by an increase in aggregate demand.

Suppose the Economy's Velocity Is Constant and the Same Level