Question

The equation of exchange ________. A) states that the quantity of money multiplied by velocity must equal nominal income in a given year B) describes a relationship that is true by definition C) shows that real GDP must equal real money balances times the number of times a dollar turns over in a year D) all of the above E) none of the above

Answer 1

The equation of exchange is given below:

M x V = P x Y.

It is M multiply by V equal to P multiply by Y.

Where, M is quantity of money

V is velocity of money.

P is price level.

Y is real GDP

And, P x Y is nominal GDP (income).

From the above equation we can say that nominal income is equal to the quantity of money multiplied by velocity.

Or, we can also conclude that real GDP (Y) must equal to real money balance (M/P) times the number of times a dollar turns over in a year (V).

Or, it describe a relationship that is true by definition.

So, the correct answer is an option (D). i.e., all of the above.