Question

the equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n) group of answer choices decrease in the money supply will increase the price level. increase in the money supply will decrease the price level. increase in the money supply will increase the price level. decrease in the money supply will have no effect on the price level.

Answer 1

When the velocity of money and real GDP are constant, an increase in the money supply will cause an increase in the nominal GDP, which could result in higher price levels if real output doesn't change.

Step-by-step explanation:

The equation of exchange, expressed as Money Supply x velocity = Nominal GDP = Price Level x Real GDP, indicates a direct relationship between the money supply and the nominal GDP when velocity and the quantity of goods and services (real GDP) are held constant. Therefore, if the velocity of money and real GDP remain unchanged, an increase in the money supply will lead to an increase in the nominal GDP. This can result in a rise in the price level (inflation) if the real output doesn't change, essentially implying that more money is chasing the same amount of goods and services.

To address the student's question: if the velocity of money and the quantity of goods and services are constant, an increase in the money supply will increase the price level.