Question

​"If nominal GDP​ rises, velocity always​ rises." Is this statement​ true, false, or​ uncertain?

A. False. If the money supply increases by a greater amount than nominal​ GDP, velocity will decline.
B. True. If nominal GDP​ rises, the money supply decreases and hence velocity will always rise.
C. False. If nominal GDP​ rises, the money supply will rise proportionately and hence velocity will remain constant.
D. Uncertain. It depends on whether nominal GDP increases because of an increase in P or an increase in Y.

Answer 1

Answer:

The correct answer is A. False. If the money supply increases by a greater amount than nominal​ GDP, velocity will decline.

Explanation:

In situations of high inflation, a substantial increase in prices - even when production remains constant - can result in a substantial increase in GDP, motivated exclusively by the increase in prices.

Therefore, nominal GDP, especially in economies with increasing inflation, can be misleading, which is why we must work on real GDP. That is, deflating or subtracting the effect of inflation on the first classification.

That is, nominal GDP may falsely indicate that production is increasing when in reality it is decreasing. From this perspective, nominal GDP is a bad indicator of economic growth. It happens that the indicator increases if prices increase, even when production remains constant. On the other hand, real GDP (by keeping prices fixed or constant in a given period of time) increases if the production of goods and services increases; and decreases, if the production of goods and services decreases. Then, it is real GDP (or at constant prices) that is the best indicator to estimate economic growth.