ge, M = the money supply, V = the velocity of money, P = the price level (inflation), and Q = the level of real output (production).
When the supply of money in an economy increases unexpectedly, the new money in the economy depresses interest rates, which in turn increase output in the economy. This phenomenon is referred to as the "liquidity effect" (Christiano, 1992). The liquidity effect typically is followed by the "anticipated inflation effect", which causes interest rates to increase and output to fall to pre-shock levels.
An expansionary monetary policy is one in which increases in the supply of money is used to lower pressures on interest rates, stimulate consumer spending, stimulate business spending, and stimulate investment to maintain or restore stability in an economy. Typica
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