According to the quantity theory of money, when velocity is constant, if output is higher, _____ real balances are required, and for fixed M this means _____ P.
A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY. If velocity (V) is constant and output (Y) increases, then for a fixed money supply (M), the price level (P) must decrease to maintain the equation balance, implying higher real balances are required.

According to the Quantity Theory of Money, When Velocity Is