Question

Suppose velocity is constant, but real GDP is not independent of the money supply. If this is the case, a 10 percent increase in the money supply will:

Answer 1

Answer: d. have an unpredictable effect on inflation.

Step-by-step explanation:

Changes in money supply affect inflation with an increase in money supply causing inflation to rise and a decrease calling inflation to fall. Real GDP is supposed to be independent of the money supply as it is not meant to be affected by inflation.

If a situation arises where real GDP is not actually independent of the money supply then that means that it is not independent of inflation either. Should the money supply therefore rise, the effect on the prices of goods and services (real GDP) in the economy will be unpredictable as it might go either way.