Asked by Saarthak Sharma on Jun 07, 2024
Verified
According to the equation of exchange,an increase in either velocity or the money supply will
A) cause GDP to rise.
B) not affect the price level.
C) cause the price level to fall.
D) cause GDP to fall.
Equation of Exchange
An economic equation that describes the relationship between the money supply, velocity of money, price level, and an economy's output.
GDP Rise
An increase in the Gross Domestic Product, indicating growth in the economy and the production of goods and services.
Velocity
In economic terms, the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period.
- Attain knowledge of the equation of exchange and its components (MV=PQ).
- Investigate the link between the quantity of money in circulation, the rate of inflation, and the steadiness of economic conditions.
Verified Answer
KP
Kayli PayneJun 08, 2024
Final Answer :
A
Explanation :
According to the equation of exchange, GDP = (money supply) x (velocity) / (price level). If either velocity or the money supply increases, then GDP will increase as well, assuming the price level stays constant. Therefore, option A is correct. Option B cannot be correct, as an increase in the money supply will certainly affect the price level, all else equal. Option C cannot be correct, as a decrease in the price level requires that the money supply or velocity decrease, not increase. Option D cannot be correct, as an increase in either velocity or the money supply will lead to an increase in GDP, not a decrease.
Learning Objectives
- Attain knowledge of the equation of exchange and its components (MV=PQ).
- Investigate the link between the quantity of money in circulation, the rate of inflation, and the steadiness of economic conditions.