Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:
A) the quantity of money explains prices.
B) the quantity of money explains velocity.
C) the quantity of money explains real GDP.
D) changes in M cause changes in V.
E) prices are never flexible

Question

Quizplus · Accepted Answer

According to the equation of exchange, MV = PQ, classical economists believe that in short-run equilibrium, both velocity (V) and real output (Q) are constant. This means that changes in the quantity of money (M) will directly cause changes in the price level (P), leading to the theory that the quantity of money explains prices (A).

Since Classical Economists Believe That Both V and Q Are