Using the equation of exchange and assuming fixed price controls and a constant velocity of money,a decrease in the discount rate could temporarily result in
A)Higher velocity.
B)Higher quantity of real output.
C)Higher price level.
D)Lower money supply.

Question

Quizplus · Accepted Answer

The equation of exchange is 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 real output. Assuming fixed price controls (P constant) and a constant velocity of money (V constant), a decrease in the discount rate typically encourages borrowing and increases the money supply (M). With P and V constant, the increase in M must lead to an increase in Q, the quantity of real output, at least temporarily.

Using the Equation of Exchange and Assuming Fixed Price Controls