The Equation of Exchange Suggests That, If the Supply and Velocity

question 4

Multiple Choice

The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause

• A)the unemployment rate to rise.
• B)the Federal Reserve Banks to sell securities in the open market.
• C)a decline in the price level.
• D)an automatic budget deficit.

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Definitions:

Multiplier Effect

An economic phenomenon where an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

Aggregate Demand

The aggregate market demand for goods and services in an economic environment, valued at a specific price level within a certain timeframe.

MPC

Marginal Propensity to Consume, which is the proportion of any additional income that a consumer spends on goods and services.

Multiplier

An economic factor that quantifies the additional effects of a change in spending on the total economic activity.