The equation of exchange shows that the supply of money in the economy can influence:
A) the level of output.
B) the level of prices.
C) both the levels of output and prices.
D) neither the levels of output or prices.

Question

Quizplus · Accepted Answer

The equation of exchange, often represented as 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 produced), suggests that changes in the money supply can affect both the level of prices and the level of output, depending on other factors like the velocity of money and the responsiveness of output to changes in monetary conditions.

The Equation of Exchange Shows That the Supply of Money