Given the equation of exchange, if V is stable, an increase in M will necessarily increase:
A) The demand for money
B) The price level
C) Nominal GDP
D) Real GDP

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV=PY), if V is stable, an increase in M will lead to an equal increase in nominal GDP (PY). This means that nominal output and/or prices will rise as a result of the increase in the money supply (M). Therefore, Option C is the correct answer. Option A is incorrect because an increase in the money supply may lead to a decrease in the demand for money due to the increase in inflation. Option B is incorrect because an increase in the money supply may not necessarily lead to an increase in the price level if there is no change in the velocity of money. Option D is incorrect because the equation of exchange does not directly relate changes in the money supply to changes in real GDP.

Given the Equation of Exchange, If V Is Stable, an Increase