According to the equation of exchange,if V is constant,and the economy is at full employment,what would a 5 percent increase in the money supply do?

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV = PQ), an increase in the money supply (M) will lead to a proportional increase in nominal output (PQ), assuming constant velocity (V). Since the economy is at full employment, any increase in output will be reflected in an equal increase in prices (P), keeping real output (Q) constant. Therefore, a 5 percent increase in the money supply will directly cause a 5 percent increase in prices.

According to the Equation of Exchange,if V Is Constant,and the Economy