Using the equation of exchange,the existence of a natural rate of unemployment implies that in the long run:
A)Velocity in the equation of exchange is actually very unstable.
B)Monetary policy affects only the rate of inflation.
C)Quantity of real output in the equation of exchange varies in proportion to money supply.

Question

Quizplus · Accepted Answer

According to the equation of exchange, the long-run level of nominal GDP is driven by the growth rate of the money supply and the velocity of money, and is independent of the natural rate of unemployment. Therefore, if a natural rate of unemployment exists, it implies that the level of real GDP will adjust in the long run to correspond with this rate, and that monetary policy will only affect the rate of inflation, not the level of output or employment.

Using the Equation of Exchange,the Existence of a Natural Rate