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.

Question

Quizplus · Accepted Answer

According to the quantity theory of money and the equation of exchange, a decrease in the money supply (caused by the Fed selling securities) will lead to a decrease in nominal aggregate spending. This is because MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output. In this equation, if the money supply (M) decreases, then either V, P, or Q must decrease to maintain the equation. Assuming that V and P are relatively constant in the short run, a decrease in M (caused by the Fed selling securities) will lead to a decrease in Q (real output) or a decrease in nominal aggregate spending.

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