In the equation of exchange, an increase in M always causes an increase in Q, and a decrease in M always causes a decrease in P.

Question

Quizplus · Accepted Answer

The equation of exchange, MV = PQ, suggests that an increase in the money supply (M) could lead to an increase in either the price level (P), the quantity of goods and services produced (Q), or the velocity of money (V), and not necessarily to an increase in Q alone. Similarly, a decrease in M could lead to a decrease in P, Q, or an adjustment in V, but it's not a one-to-one relationship where a decrease in M always causes a decrease in P.

In the Equation of Exchange, an Increase in M Always