The equation of exchange is an identity because

Question

Quizplus · Accepted Answer

The equation of exchange, MV = PQ, is an identity because it defines the relationship between money and prices in a given economy, where M is the money supply, V is velocity, P is the price level, and Q is the level of real output. It is an identity because it must always be true by definition, regardless of whether any of the variables change. The choice "of the way velocity is defined" is correct because the identity assumes that velocity is a constant, which is a simplifying assumption. Choices A, B, and D are incorrect because they do not accurately describe the reason why the equation is an identity.

The Equation of Exchange Is an Identity Because