Question

According to the quantity theory, if constant growth in the money supply is combined with fluctuating velocity, which of the following is most likely to result?

A. unpredictable rises and falls in nominal GDP
B. monetary policy will become inevitably imprecise
C. quantity of credit rises above where it otherwise be
D. innovations relating to banking and finance

Answer 1

A

Step-by-step explanation:

The quantitative theory of money states that MV=PT.

M: money supply

V: velocity of circulation (number of times that a dollar changes of holder in a period)

P : price of a typical transaction

T: total number of transactions.

We can also write the equation as MV=PY, because the value of transactions is equal to the GDP (Y).

If M has a constant growth but there are fluctuations in V, then P, Y or both change.