Which of the following is assumed to be constant in the quantity theory of money?
A)The money supply
B)Real GDP
C)The price level
D)The velocity of money
E)Nominal GDP

Question

Quizplus · Accepted Answer

The quantity theory of money assumes that the velocity of money, which is the rate at which money changes hands in the economy, is constant. This allows for a straightforward relationship between the money supply and the price level, as expressed in the equation of exchange (MV=PY), where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. By assuming that V is constant, the theory simplifies the relationship between the other variables.

Which of the Following Is Assumed to Be Constant in the Quantity