Question

If velocity is constant over time, then a certain percentage rise in the money supply on the left-hand side of the basic quantity equation of money will inevitably lead to the same percentage rise in nominal GDP—although this change could happen through an increase in inflation, or an increase in real GDP, or some combination of the two. If velocity is changing over time but in a constant and predictable way, then changes in the money supply will continue to have a predictable effect on nominal GDP. If velocity changes unpredictably over time, however, then the effect of changes in the money supply on nominal GDP becomes unpredictable.

(True/False)

Answer 1

If velocity is constant or changes in a predictable manner, changes in the money supply will have a predictable effect on nominal GDP. But if velocity changes unpredictably, the effect of changes in the money supply on nominal GDP will become unpredictable.

Step-by-step explanation:

True. If velocity is constant over time, then a certain percentage rise in the money supply will lead to the same percentage rise in nominal GDP. However, this change in nominal GDP can happen through an increase in inflation or an increase in real GDP, or a combination of both.

When velocity is changing over time but in a constant and predictable way, changes in the money supply will still have a predictable effect on nominal GDP. However, if velocity changes unpredictably over time, then the effect of changes in the money supply on nominal GDP becomes unpredictable.

Therefore, if velocity is constant or changes in a predictable manner, changes in the money supply will have a predictable effect on nominal GDP. But if velocity changes unpredictably, the effect of changes in the money supply on nominal GDP will become unpredictable.