Velocity will be constant if the demand for money with respect to the interest rate is
A) unitary elastic.
B) perfectly inelastic.
C) perfectly elastic.
D) elastic, but not perfectly elastic.

Question

Quizplus · Accepted Answer

If the demand for money with respect to the interest rate is perfectly inelastic, then changes in the interest rate will have no effect on the demand for money. Consequently, velocity will remain constant. This is because the demand for money determines the quantity of money people will choose to hold, and if the demand is perfectly inelastic, people will hold a fixed amount of money regardless of changes in the interest rate.

Velocity Will Be Constant If the Demand for Money with Respect