Question

If the income velocity of money and real output are both constant, then the equation of exchange leads us to the conclusion that if the money supply, M, is doubled, then _____ .

Answer 1

If the money supply, M, is doubled while the income velocity of money and real output are both constant, the nominal GDP will also double.

Step-by-step explanation:

According to the equation of exchange, if the income velocity of money and real output are both constant, then a doubling of the money supply, M, will lead to a doubling of the nominal GDP. This happens because if velocity remains constant, the increase in the money supply will be directly reflected in the increase in nominal GDP. For example, if the money supply is $1 trillion and nominal GDP is $10 trillion, doubling the money supply to $2 trillion will result in a doubling of nominal GDP to $20 trillion.