The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause
A) the unemployment rate to rise.
B) the Federal Reserve Banks to sell securities in the open market.
C) a decline in the price level.
D) an automatic budget deﬁcit.

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 real output of goods and services. If M and V remain constant and Q increases, then P must decrease in order to maintain the equation. Therefore, an increase in the physical volume of goods and services produced will cause a decline in the price level.

The Equation of Exchange Suggests That, If the Supply and Velocity