5. The equation of exchange Aa Aa The equation of exchange is given by M x V = P

Question

5. The equation of exchange Aa Aa The equation of exchange is given by M x V = P x Q, where M is the money supply, V is the velocity of money, P is the economy's price level, and Q is real GDP. Assume that the real GDP = $6 trillion and the price level is 6. The nominal GDP is Suppose the velocity of money is 3. The money supply in the economy is $35 trillion . Because velocity and real GDP is assumed to be constant ,the percentage increase in the price level is the same asthe percentage increase in the money supply. This illustrates the quantity theory of money fact that monetary policy can increase real GDP quantity theory of money importance of the Bank of Canada

Explanation / Answer

1) MV = PY

Nominal GDP = PY = 6 x $ 6 trillion = $ 36 trillion

2) MV = PY

M x 3 = $ 36 trillion

M = 12 trillion

3) Velocity and real GDP is assumed to be constant

4) the same as

5) quantity theory of money

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