Final answer:
In the quantity theory of money, velocity is assumed to be highly constant. However, due to fluctuations in the velocity of M1 in the 1980s, central banks shifted their monetary policy strategies to focus more on inflation and unemployment, rather than just the money supply growth rate.
Step-by-step explanation:
In the context of the quantity theory of money, the term velocity is assumed to be highly constant. This theory posits that if the velocity of money is stable, any change in the money supply should have a directly proportional effect on nominal GDP. However, historical evidence, especially from the 1980s, showed that the velocity of M1 money stock began to fluctuate. This fluctuation made the growth of the money supply at a predetermined and unchanging rate less desirable because the unpredictability in velocity could cause nominal GDP to rise and fall in unpredictable movements of velocity, leading to instability in prices or output.
Central banks had to reconsider their monetary policy strategies, shifting focus from targeting money supply growth rates to addressing concerns about inflation and unemployment. The unpredictability of the velocity of money had significant implications for monetary policy, as it complicated the relationship between money supply changes and economic outcomes, such as unemployment and inflation. Thus, the assumption of a constant velocity in the quantity theory of money has been challenged by real-world economic dynamics.