For the quantity theory of money to yield useful predictions,
A)fiscal policy must be ineffective in altering aggregate demand
B)fiscal policy must be effective in altering aggregate demand
C)the economy must be operating at the potential level of real Gross Domestic Product
D)velocity must be stable or predictable
E)velocity must be unstable

Question

Quizplus · Accepted Answer

For the quantity theory of money to yield useful predictions, velocity must be stable or predictable. This is because the theory is based on the equation of exchange, which states that the quantity of money multiplied by velocity equals the price level multiplied by real output. If velocity is unpredictable or unstable, it becomes difficult to make accurate predictions about the impact of changes in the money supply on the price level and real output. Fiscal policy is not directly related to the quantity theory of money, although it can affect aggregate demand through changes in government spending and tax policy. The state of the economy also does not have a direct impact on the validity of the quantity theory of money.

For the Quantity Theory of Money to Yield Useful Predictions