Asked by Kylie Gravel on May 06, 2024
Verified
According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also either a
A) rise in output or a rise in velocity.
B) rise in output or a fall in velocity.
C) fall in output or a rise in velocity.
D) fall in output or a fall in velocity.
Quantity Equation
An equation that relates the quantity of money in an economy to the nominal value of transactions, used in economics to describe the relationship between money supply and price level.
Price Level
A measure of the average prices of goods and services in an economy at a specific time.
Money Supply
The aggregate of financial assets in an economy at a specific moment, which includes cash, coins, and the deposits in checking and savings accounts.
- Employ the quantity theory of money for predicting the impact of money supply fluctuations on nominal and real GDP.
Verified Answer
RE
Robert ElkindMay 06, 2024
Final Answer :
B
Explanation :
The quantity equation is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the output. According to this equation, if the money supply (M) increases, the price level (P) would increase less than proportionately if there is either a rise in output (Q) or a fall in velocity (V), as both of these changes would absorb some of the impact of the increased money supply on the price level.
Learning Objectives
- Employ the quantity theory of money for predicting the impact of money supply fluctuations on nominal and real GDP.