A key assumption in the quantity theory of money is that
A)The supply of money is increasing at a constant rate
B) The price level is stable over long periods of time
C)The level of output of goods and services changes frequently in response to changes in velocity
D)The velocity of money is constant
E)None of the above

Question

A key assumption in the quantity theory of money is that
A)The supply of money is increasing at a constant rate 
B) The price level is stable over long periods of time
C)The level of output of goods and services changes frequently in response to changes in velocity
D)The velocity of money is constant
E)None of the above

Quizplus · Accepted Answer

The quantity theory of money assumes that the velocity of money (the rate at which money changes hands) is constant, which implies that changes in the supply of money directly affect the level of nominal output (P × Y). The theory also suggests that changes in the money supply affect prices in the long run, while the level of output is determined by real factors such as technology and resources. Therefore, choices A, B, and C are incorrect.

A Key Assumption in the Quantity Theory of Money Is