According to the equation of exchange, a contractionary monetary policy must be adopted to offset any decrease in the velocity of money.

Question

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The equation of exchange, MV = PQ, suggests that if the velocity of money decreases, a contractionary monetary policy could prevent inflation but wouldn't necessarily bring it back to its previous level. In fact, The Federal Reserve might not need to take action if changes in velocity aren't causing inflation to rise above the central bank's target.

According to the Equation of Exchange, a Contractionary Monetary Policy