If the quantity of real money balances is kY, where k is a constant, then velocity is:
A) k.
B) 1/k.
C) kP.
D) P/k.

Question

Quizplus · Accepted Answer

Velocity (V) is defined as the ratio of nominal output (PY) to the quantity of real money balances (M/P). So, V = PY/(M/P), which can be simplified to V = kY/(M/P) = (kY/P)/(M/P) = (k/P)(Y/M). Since k is a constant, Y/M is the inverse of the quantity of real money balances (M/Y), which is also known as the velocity of money. Therefore, V = (k/P)(1/(M/Y)) = 1/k.

If the Quantity of Real Money Balances Is KY, Where