Question

The quantity theory of money assumes that the velocity of money

a. is constant.
b. will rise if the money supply rises and fall if the money supply falls.
c. will rise if the money supply rises, but will not change if the money supply falls.
d. will fall if the money supply rises, and will rise if the money supply falls.

Answer 1

The quantity theory of money assumes that the velocity of money is constant.

Step-by-step explanation:

The quantity theory of money assumes that the velocity of money is constant. This means that the speed at which money circulates in the economy remains stable over time.

In other words, if the money supply increases, the velocity of money will remain the same, leading to a proportional increase in nominal GDP. Similarly, if the money supply decreases, the velocity of money will also remain constant, resulting in a corresponding decrease in nominal GDP.

Therefore, option a is the correct answer: The quantity theory of money assumes that the velocity of money is constant.