The quantity theory of money begins with the equation containing the money supply (M), velocity of money (V), average prices (P) and real GDP (Q), and then assumes that
A) M does not change when V changes.
B) V does not change when Q changes.
C) V is fixed and Q is fixed at potential GDP.
D) V is fixed and Q is fixed at real GDP.
E) V is fixed and Q is fixed at nominal GDP.

Question

Quizplus · Accepted Answer

The quantity theory of money assumes that velocity (V) is fixed, meaning that it does not change, and that real GDP (Q) is fixed at potential GDP, meaning that the economy is operating at full employment. Therefore, the equation becomes MV = PQ, where P represents the average price level. This assumption allows for a direct relationship between changes in the money supply (M) and changes in the price level (P).

The Quantity Theory of Money Begins with the Equation Containing