The quantity theory of money assumes that velocity is approximately constant resulting in nominal GDP to be proportional to the money stock.

Question

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The quantity theory of money equation is MV = PQ, where M is the money stock, V is velocity, P is the price level, and Q is the real output. The theory assumes that velocity is roughly constant in the short run and that changes in M lead to proportional changes in P and Q. This assumption has been criticized and debated, but it is a key feature of the theory.

The Quantity Theory of Money Assumes That Velocity Is Approximately