Question

Given the equation of exchange set forth by the quantity theory of money (M×V=P×Q), where M is the supply of money, V is the velocity of money, P is the price level, and Q is real output, which of the statements best defines Q?

a. The quantity of goods and services produced within an economy.
b. The average of level of prices for a given basket of goods.
c. The average number of times a dollar is spent in a given period of time.

Answer 1

In the equation of exchange (M×V=P×Q), Q represents the quantity of goods and services produced within an economy, or Real GDP. Other components of the equation include the money supply (M), the velocity of money (V), and the price level (P).

Step-by-step explanation:

In the equation of exchange M×V=P×Q, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output, Q defines the quantity of goods and services produced within an economy. This element of the equation represents the Real GDP, which is the total value of all final goods and services produced within a country's borders in a given year, measured in constant prices, discounting inflation. The other options provided, such as the average level of prices for a given basket of goods and the average number of times a dollar is spent in a given period of time, correspond to P and V respectively, where P refers to the general price level of goods and services in the economy, and V indicates the velocity, or the rate at which money circulates in the economy.