The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n)
A) decrease in the money supply will increase the price level.
B) increase in the money supply will decrease the price level.
C) increase in the money supply will increase the price level.
D) decrease in the money supply will have no effect on the price level.

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. Holding V and Q constant, an increase in M will result in an increase in P. This is because with more money in circulation, there is more demand for goods and services, which can drive up prices. Therefore, choice C is the correct answer.

The Equation of Exchange Suggests That If the Velocity of Money