The quantity equation implies that any decrease in the money supply has to lead directly to:
A) an increase in P.
B) a decrease in P.
C) an increase in Y.
D) a decrease in Y.

Question

Quizplus · Accepted Answer

The quantity equation (MV = PY) states that the money supply (M) multiplied by the velocity of money (V) equals the price level (P) multiplied by the real output (Y). If the money supply (M) decreases, and velocity (V) and real output (Y) remain constant, then this equation implies that the price level (P) must decrease as well. Therefore, choice B is the correct answer.

The Quantity Equation Implies That Any Decrease in the Money