Question

If real GDP and the money supply stay the same and the aggregate price level increases, then

Group of answer choices
a. The velocity of money has to increase.
b. Nominal GDP remains constant.
c. The velocity of money has to decrease.
d. The real GDP had to rise.

Answer 1

If real GDP and the money supply stay the same and the aggregate price level increases, then the velocity of money has to increase.

Step-by-step explanation:

If real GDP and the money supply stay the same and the aggregate price level increases, then the velocity of money has to increase (option a).

In an economy, the equation of exchange helps us understand the relationship between the money supply, velocity of money, and nominal GDP. The equation is Money Supply x Velocity = Nominal GDP = Price Level x Real GDP. If real GDP and the money supply remain constant while the aggregate price level increases, for the equation to hold true, the velocity of money must increase.

For example, if the money supply stays the same at $1,000 and the price level increases by 10%, the velocity of money must increase by 10% as well, for the equation to balance.