If the money supply increases, while prices and velocity remain constant, real GDP will:
Question
If the money supply increases, while prices and velocity remain constant, real GDP will:
Solution
If the money supply increases while prices and velocity remain constant, real GDP will increase. This is based on the Quantity Theory of Money, which is often expressed with the equation MV = PQ.
Here's the step-by-step explanation:
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The Quantity Theory of Money equation is MV = PQ, where M is the money supply, V is the velocity of money (how fast money changes hands), P is the price level, and Q is the quantity of goods and services produced (which is equivalent to real GDP).
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If M (money supply) increases, and V (velocity) and P (price level) remain constant, then Q (real GDP) must increase to balance the equation.
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Therefore, an increase in the money supply, with constant prices and velocity, will lead to an increase in real GDP.
Similar Questions
In the long run, an increase in the money supply will lead toResponsesA a decrease in velocity. a decrease in velocity.B an increase in velocity.an increase in velocity.C a decrease in real GDP.a decrease in real GDP.D an increase in real GDP.
Because money serves as a medium of exchange, an increase in real GDP: a. decreases the buying and selling of goods and services and so decreases the demand for money. b. increases the buying and selling of goods and services and so decreases the demand for money. c. increases the buying and selling of goods and services and so increases the demand for money. d. decreases the buying and selling of goods and services and so increases the demand for money.
Key ideas→ In the long run, an increase in the quantityof money leads to an equal percentageincrease in the price level→ Nominal GDP = PY→ V = PY/M→ P = M(V/Y)→ (Inflation rate) = (Money growth rate) +(Growth rate of velocity) − (Real GDPgrowth rate)
If real GDP decreases: a. there will be a downward movement along the money demand curve. b. the money demand curve will shift to the left. c. there will be an upward movement along the money demand curve. d. the money demand curve will shift to the right.
According to the quantity equation, if velocity and real GDP are constant and the Reserve Bank increases the money supply by 5%, then the price level:Group of answer choicesis also constantdecreases by 10%increases by 5%decreases by 5%
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