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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

In the equation of exchange MV = PT, a monetarist assumes that in the long run, with V stable and T determined by real factors, an increase in M will lead mainly to which outcome?

With velocity stable and real output set by real supply-side factors, the equation of exchange implies that a rise in the money supply produces a proportionate rise in the price level. Real output is not lastingly raised by monetary expansion.

  1. AA proportionate rise in the price level PCorrect
  2. BA proportionate rise in real output T
  3. CA fall in the velocity V that fully offsets M
  4. DA fall in the price level P
  5. A rise in T and a fall in P of equal size

Explanation

With V stable and T fixed by real supply-side factors, MV = PT implies P changes in proportion to M. Output rising instead is the Keynesian short-run view with slack capacity, which monetarists do not expect in the long run.

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