If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will
A) increase prices.
B) increase interest rates.
C) increase real output.
D) decrease nominal GDP.

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 real output, if velocity is constant and the economy is at full employment, an increase in the money supply (M) will lead to an increase in prices (P), since Q cannot increase further.

If the Velocity of Money Remains Unchanged and the Economy