Since, in classical economic theory, both the velocity of money and real output are assumed to be stable,
A)changes in the quantity of money explain changes in the price level.
B)changes in the quantity of money explain changes in real GDP.
C)changes in the money supply cause changes in the velocity of money.
D)prices are fixed.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, which is a classical economic theory, the equation of exchange MV=PY assumes that both velocity of money and real output are stable. Therefore, any change in the quantity of money (M) solely affects the price level (P). Thus, changes in the quantity of money explain changes in the price level (A).

Since, in Classical Economic Theory, Both the Velocity of Money