If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will:
A) Increase prices
B) Increase interest rates
C) Increase real output
D) Decrease nominal GDP

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 quantity of goods and services produced. If the velocity of money remains unchanged and the economy is at full employment, then Q is fixed. As a result, an increase in the money supply (M) will lead to an increase in prices (P). This is because there is more money chasing a fixed amount of goods and services, leading to inflation.

If the Velocity of Money Remains Unchanged and the Economy