The equation of exchange
A)states that the price level times velocity equals GDP divided by the interest rate
B)states that total spending equals real GDP
C)states that money supply times velocity equals real GDP
D)is an identity,not a theory
E)becomes the quantity theory of money on the assumption that the price level is always constant

Question

Quizplus · Accepted Answer

The equation of exchange is considered an identity because it is always true by definition, not a theory that can be proven or disproven. It states that the total amount of money spent in an economy (MV) is equal to the total value of goods and services produced in that economy (PQ). Therefore, the formula is: MV = PQ.

The Equation of Exchange