Given the equation of exchange, MV = PQ, if the money supply is increased when the economy is operating at full employment the expected result will be an increase in:
A) output (Q).
B) velocity (V).
C) the price level (P).
D) unemployment (Q-V).

Question

Quizplus · Accepted Answer

When the economy is operating at full employment, increasing the money supply (M) typically does not increase output (Q) because the economy is already producing at its maximum capacity. Instead, the increase in money supply leads to an increase in the price level (P), as the same amount of goods and services is chased by more money. This is a classic example of demand-pull inflation. Velocity (V) is not directly affected by changes in the money supply in the short term, and unemployment is not directly related to this equation.

Given the Equation of Exchange, MV = PQ, If the Money