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

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced. If V is constant, then an increase in M results in an increase in PQ, which means an increase in P. Thus, an 8 percent increase in the money supply would result in an 8 percent increase in average prices assuming the velocity of money remains constant at 5.

The Velocity of Money Is 5