In a full-employment economy, a rise in M will cause inﬂation unless
A) V rises in proportion to the increase in M.
B) the quantity of goods produced declines proportionately.
C) tax reductions accompany the increase in the money supply.
D) the velocity of money diminishes.

Question

Quizplus · Accepted Answer

In a full-employment economy, an increase in the money supply (M) will lead to inflation unless the velocity of money (V) decreases. This is because, at full employment, the economy is at its maximum output capacity, and any increase in money supply without a corresponding increase in goods and services will lead to higher prices rather than increased production. A decrease in the velocity of money would mean that money is changing hands less frequently, potentially offsetting the inflationary pressure of the increased money supply.

In a Full-Employment Economy, a Rise in M Will Cause