In the quantity theory of money
A)prices are rigid.
B)both velocity of money and real output are variable.
C)changes in the money supply cause changes in velocity of money.
D)the velocity of money is assumed to be stable.

Question

Quizplus · Accepted Answer

The quantity theory of money assumes that the velocity of money is stable, meaning that changes in the money supply will directly cause changes in prices. Choice A is incorrect because the quantity theory assumes that prices are flexible and will adjust based on changes in the money supply. Choice B is incorrect because the quantity theory assumes that real output is constant in the short run. Choice C is incorrect because the quantity theory assumes a stable velocity of money, so changes in the money supply do not directly cause changes in velocity.

In the Quantity Theory of Money