The quantity theory of money begins with the equation of exchange, MV = PY, and then adds the assumptions that
A)velocity and the price level are independent of the quantity of money.
B)velocity and potential GDP are independent of the quantity of money.
C)velocity varies inversely with the interest rate, and the price level is independent of the quantity of money.
D)potential GDP and the price level are independent of the quantity of money.
E)potential GDP and the quantity of money are independent of the price level.

Question

Quizplus · Accepted Answer

The quantity theory of money, as represented by the equation of exchange MV = PY, assumes that the velocity of money (V) and potential GDP (Y, in this context) are independent of the quantity of money (M). This means changes in the money supply directly affect the price level (P) under the assumption that V and Y are constant.

The Quantity Theory of Money Begins with the Equation of Exchange