Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed 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

When 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 in this scenario, the Fed can decrease the money supply, which would counteract the increased velocity and help maintain price stability.

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