The money supply rises 6% at the same time the country's output rises 2%. What would occur in this country based on the equation of exchange?

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV = PQ), an increase in the money supply (M) would lead to inflation (P) assuming that velocity (V) and output (Q) remain constant. Therefore, a 6% increase in the money supply, along with a 2% increase in output, would lead to a 4% inflation rate (6% - 2% = 4%). Therefore, the correct answer is C.

The Money Supply Rises 6% at the Same Time the Country's