In the equation of exchange, velocity will tend to rise when:
A)the price level rises, other things being equal.
B)real GDP rises, other things being equal.
C)the money supply declines, other things being equal.
D)all of the above.

Question

In the equation of exchange, velocity will tend to rise when:
A)​the price level rises, other things being equal.
B)​real GDP rises, other things being equal.
C)​the money supply declines, other things being equal.
D)​all of the above.

Quizplus · Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. Velocity (V) will tend to rise when the money supply (M) declines, the price level (P) rises, or real GDP (Q) rises, assuming other factors remain constant. This is because a decrease in M, or an increase in P or Q, would require V to increase to maintain the equality if the other side of the equation is to remain constant.

In the Equation of Exchange, Velocity Will Tend to Rise