The equation of exchange indicates that if a decrease in the money supply does not impact velocity or real GDP, then it must:
A) cause currency reform to accelerate.
B) cause currency reform to decelerate.
C) lead to a decrease in the price level.
D) lead to an increase in 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 real GDP. If the money supply decreases and velocity (V) and real GDP (Q) remain constant, then the price level (P) must decrease to balance the equation.

The Equation of Exchange Indicates That If a Decrease in the Money