According to the monetarist view and the equation of exchange,which of the following will occur because the Fed sells securities in the open market?
A)A decrease in real interest rates.
B)A decrease in nominal aggregate spending.
C)A lower level of real output.
D)An increase in the price level.

Question

Quizplus · Accepted Answer

When the Fed sells securities in the open market, it effectively reduces the money supply. 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 the quantity of goods and services produced (real output), a decrease in the money supply (M) would lead to a decrease in nominal aggregate spending (PQ), assuming V is constant. This is because there is less money in circulation for the same amount of goods and services, leading to a decrease in spending.

According to the Monetarist View and the Equation of Exchange,which