In an economy, if the velocity of money falls faster than the supply of money, ____
a. ?nominal GDP will increase
b. ?nominal GDP will decrease
c. ?the price level will increase rapidly
d. ?nominal GDP will stay the same
e. ?commercial banks will decrease the creation of money
Answer: b. ?nominal GDP will decrease.
MV = PY
Where, M = money supply, P = price level
V = velocity, Y = real output
PY = nominal output
A fall in M & V implies PY will be falling too. Nominal GDP will fall.
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