If the equation of exchange holds, and if the velocity of money and total output are fixed, then, if the money supply doubles,
A) the price level will increase by half.
B) the price level will decrease by half.
C) the price level will double.
D) the price level will decrease by 25 percent.

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is total output. If the velocity of money and total output are fixed, and the money supply doubles from M to 2M, then PQ doubles as well to maintain the equality in the equation. Thus, the price level (P) must double.

If the Equation of Exchange Holds, and If the Velocity