Using the equation of exchange and assuming full employment and a constant velocity of money,a decrease in the required reserve ratio would result in a
A)Lower velocity.
B)Lower quantity of real output.
C)Higher price level.
D)Lower price level.

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV = PQ), a decrease in the required reserve ratio would increase the money supply (M) since banks are required to hold fewer reserves, which leads to an increase in the price level (P) if the quantity of output (Q) remains constant. This is because there is more money chasing the same amount of goods and services, resulting in higher prices. The velocity of money (V) is assumed to be constant in this scenario, so it is not affected by the decrease in the reserve ratio.

Using the Equation of Exchange and Assuming Full Employment and a Constant