If the demand for money depends on the interest rate, velocity is
A) not constant, and the quantity theory of money does hold.
B) not constant, and the quantity theory of money does not hold.
C) constant, and the quantity theory of money does not hold.
D) constant, and the quantity theory of money does hold.

Question

Quizplus · Accepted Answer

If velocity is not constant, then the quantity theory of money does not hold. When the demand for money depends on the interest rate, people may hold more or less money as the interest rate changes. This means that velocity is not constant, as it depends on changes in the interest rate. Therefore, the quantity theory of money does not hold.

If the Demand for Money Depends on the Interest Rate