The equation of exchange becomes the same as the quantity theory of money by assuming that the velocity of circulation ________ when the quantity of money changes and potential GDP ________ when the quantity of money changes.
A) changes; changes
B) changes; does not change
C) does not change; changes
D) does not change; does not change

Question

Quizplus · Accepted Answer

The equation of exchange becomes the same as the quantity theory of money by assuming that the velocity of circulation does not change when the quantity of money changes, and potential GDP does not change when the quantity of money changes. This allows for a direct relationship between money supply and price level, holding velocity and potential GDP constant.

The Equation of Exchange Becomes the Same as the Quantity