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.

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 the quantity of goods and services exchanged. Assuming full employment and a constant velocity of money, a decrease in the required reserve ratio would increase the money supply (M), which would lead to an increase in the price level (P). Therefore, the correct answer is C, a higher price level. A decrease in the required reserve ratio would not directly affect the velocity of money or the quantity of real output.

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