The velocity of money is 5. The quantity theory of money suggests that an 8 percent increase in the money supply results in a 40 percent increase in average prices.

Question

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According to the quantity theory of money, if the velocity of money is constant, an 8 percent increase in the money supply would lead to an 8 percent increase in the nominal value of output (which is often approximated by the price level if real output is constant). The 40 percent increase in average prices would require a much larger increase in the money supply or a change in the velocity of money, assuming other factors remain constant.

The Velocity of Money Is 5