Unformatted text preview: Question 8
1. Fill in the blanks considering the equation of exchange below based on the classical
Where M is the supply of money, V is the velocity of money, P is the price level, and Q is the
economy's real output level.
In the long run, velocity (V) is assumed to be fixed by existing monetary institutions and real
output (Q) is assumed to be (1) _
_ at full employment. If the government determines to
increase money supply, then this change will translate directly to a change in prices (P), or in
other words, (2)
O (1) fixed / (2) deflation
O (1) increasing / (2) inflation
O (1) increasing / (2) deflation
(1) fixed / (2) inflation...
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- Winter '11