Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:
A) the quantity of money explains prices.
B) the quantity of money explains velocity.
C) the quantity of money explains real GDP.
D) changes in M cause changes in V.

Question

Quizplus · Accepted Answer

Classical economists believe that in short-run equilibrium, both V and Q are constants. Therefore, according to the equation of exchange (MV = PQ), any changes in M (the quantity of money) will cause changes in P (prices) and Q (real GDP), since V (velocity of money) is assumed to be constant. Thus, the theory implies that changes in the quantity of money explain changes in prices, which is choice A.

Since Classical Economists Believe That Both V and Q Are