According to the equation of exchange, increasing the money supply when the economy is experiencing unemployment should primarily increase the:
A) price level.
B) level of total output.
C) unemployment rate.
D) velocity of money, V.

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV = PQ), where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of total output, increasing the money supply (M) when the economy is experiencing unemployment should primarily increase the level of total output (Q). This is because, in the short run, with unemployed resources, the economy can increase production without immediately causing inflation (increasing P).

According to the Equation of Exchange, Increasing the Money Supply