According to the quantity equation, when velocity is stable, which of the following best describes the effects of an increase in the money supply?
A) An increase in the money supply causes a proportional increase in nominal GDP but not in the price level.
B) An increase in the money supply causes a proportional increase in the price level and real GDP.
C) An increase in the money supply causes a proportional increase in the real GDP but not in the price level.
D) An increase in the money supply causes a proportional increase in the price level and nominal GDP.

Question

Quizplus · Accepted Answer

According to the quantity equation, MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. When velocity is stable, an increase in the money supply (M) will lead to an increase in the nominal value of transactions (PY), which implies an increase in both the price level (P) and the level of real output (Y), resulting in a proportional increase in nominal GDP (P x Y). Therefore, choice D is the correct answer.

According to the Quantity Equation, When Velocity Is Stable, Which