Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, how does the price level change?
A)The inflation rate will be zero.
B)The price level will fall by 9.09 percent.
C)The price level will rise by 10 percent.
D)The price level will rise by 9.09 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money (MV = PY), if velocity (V) is stable and the money supply (M) does not change, then an increase in real GDP (Y) by 10% would require the price level (P) to decrease to maintain the equation's balance. The price level would fall by approximately 9.09% to offset the 10% increase in real GDP.

Assuming That Velocity Is Stable, If Real GDP Grows by 10