Answer to Question #116620 in Macroeconomics for Anshika

Question

Suppose central bank keeps money supply constant. What is the effect of fiscal policy?

Answer 1

Fisher equation:

$M*V=P*Y$

$M=\frac{P*Y}{V}$

M-money supply

V-velocity of circulation

P-price level

Y-national output

If central bank keeps money supply constant it will be following effect:

If prices or/and national output increase then the velocity of circulation grows proportionally. And vice versa.