According to both the equation of exchange and the quantity theory of money,

Question

Quizplus · Accepted Answer

Both the equation of exchange and the quantity theory of money suggest that an increase in the money supply will lead to an increase in the price level, ceteris paribus. Therefore, a decrease in the money supply would result in a reduction in the price level. This is in line with option D. Option A is incorrect since an increase in the money supply would likely result in an increase in consumption and demand, which could lead to an increase in real output in the short-run, but not in the long-run. Option B is incorrect since a decrease in the money supply would reduce demand and consumption, which would decrease output. Option C is incorrect since a decrease in the money supply is likely to increase the velocity of money as people try to spend their money more quickly.

According to Both the Equation of Exchange and the Quantity