An assumption of the quantity theory of money is that the velocity of money:
A) remains relatively constant.
B) rises with increases in the money supply.
C) rises with increases in real GDP.
D) rises with increases in the price level.

Question

Quizplus · Accepted Answer

The quantity theory of money assumes that the velocity of money (the number of times a unit of money is spent in a given period of time) remains relatively constant. This assumption forms the basis for the equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output. If V were to rise with increases in the money supply or the price level, the relationship between the variables would be different, and the equation of exchange would not hold.

An Assumption of the Quantity Theory of Money Is That