The equation of exchange states that
A) saving equals investment.
B) gross domestic product equals the money supply multiplied by its velocity.
C) increases in money supply cause decreases in velocity.
D) increases in money supply cause increases in velocity.

Question

Quizplus · Accepted Answer

The equation of exchange is 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. This equation states that gross domestic product (PQ) equals the money supply (M) multiplied by its velocity (V), making choice B the correct answer. Choices A, C, and D are incorrect because they do not accurately reflect the equation of exchange.

The Equation of Exchange States That