The quantity equation becomes the basis for a theory when we assume that velocity of money is constant.

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The quantity equation, also known as the equation of exchange, is MV = PQ where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of real output. This equation becomes the basis for the quantity theory of money (QTM) when we assume that V is constant. The QTM argues that changes in the quantity of money lead to proportional changes in prices in the long run.

The Quantity Equation Becomes the Basis for a Theory When