Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Bank of Canada might be able to stabilize output by:
A)decreasing the money supply.
B)increasing the money supply.
C)decreasing the price level.
D)increasing the price level.

Question

Quizplus · Accepted Answer

If the velocity of money increases, it means that each unit of currency is being used more frequently to purchase goods and services. To stabilize output and prevent inflation, the Bank of Canada might decrease the money supply to offset the increased velocity and maintain the balance between money supply and demand.

Starting from Long-Run Equilibrium, If the Velocity of Money Increases