When the Fed sells securities through open market operations,the equation of exchange (under monetarist assumptions about V being stable)requires that either aggregate spending
A)Increases or prices decrease,or both.
B)Or prices decrease,or both.
C)Decreases or prices increase,or both.
D)Or prices increase,or both.

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV=PY), if the Fed sells securities, it will decrease the money supply (M). Assuming that the velocity of money (V) remains constant, this will lead to a decrease in aggregate spending (PY). In order to restore equilibrium, either prices (P) will have to decrease or both prices and output (Y) will have to decrease. Therefore, the correct answer is B, "Or prices decrease, or both."

When the Fed Sells Securities Through Open Market Operations,the Equation