The equation of exchange indicates that:
A) MQ equals VP
B) The velocity of money and the supply of money vary proportionately with one another
C) Other things being equal, an increase in V will increase P and/or Q
D) Other things being equal, M and P are inversely related

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 goods and services exchanged. According to this equation, an increase in V will result in an increase in P and/or Q, assuming that M and Q remain constant. Therefore, choice C is correct. Option A is incorrect because it does not reflect the equation of exchange. Option B is incorrect because the velocity of money and the supply of money may not vary proportionately. Option D is incorrect since M and P are directly related according to the equation of exchange.

The Equation of Exchange Indicates That