The quantity theory of money was derived from the quantity equation by asserting that
A)real output was fixed.
B)the money supply was fixed.
C)the velocity of money was fixed.
D)the velocity of money was zero.

Question

Quizplus · Accepted Answer

The quantity theory of money asserts that the money supply (M) multiplied by the velocity of money (V) equals the price level (P) multiplied by real output (Y), or MV = PY. The theory assumes that the velocity of money is relatively stable over time, meaning that changes in the money supply are proportional to changes in the price level. Therefore, an increase in the money supply will lead to a proportional increase in prices, while a decrease in the money supply will lead to a proportional decrease in prices. Since the theory assumes a fixed velocity of money, choice C is the best answer.

The Quantity Theory of Money Was Derived from the Quantity