Quantity Equation: Understanding Its Implications

The quantity equation states that the money supply (M) multiplied by the velocity of money (V) equals the price level (P) multiplied by the real output (Y): MV = PY. This equation reveals key relationships between these variables.

Let's analyze the given options:

A. With constant money supply and output, an increase in velocity creates an increase in the price level. This statement is implied by the quantity equation. If M and Y are constant, an increase in V necessitates an increase in P to maintain the equation's balance.

B. With constant money supply and velocity, an increase in output creates a proportional increase in the price level. This statement is not implied by the quantity equation. If M and V are constant, an increase in Y would actually lead to a decrease in the price level (P) to maintain the equation's balance.

C. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output. This statement is implied by the quantity equation. If V is stable and money is neutral, meaning it only affects nominal variables, an increase in M leads to a proportional increase in PY, which represents nominal output.

D. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. This statement is implied by the quantity equation. If V is stable and money is neutral, an increase in M will primarily impact the price level (P) to maintain the equation's balance.

Therefore, the correct answer is B. With constant money supply and velocity, an increase in output does not create a proportional increase in the price level. Instead, it would lead to a decrease in the price level.