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.

Question

Quizplus · Accepted Answer

According to the equation of exchange (MV = PQ), if the Fed reduces the money supply by selling securities, assuming a stable velocity of money, aggregate spending (PQ) must also decrease. As a result, either prices (P) must decrease or output (Q) must decrease. Therefore, the best choice is B, as aggregate spending decreases or prices decrease, or both.

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