Question
According to the Quantity Theory of Money (QTM), what is
the effect of a change in the velocity of money on the price level in the long run?Solution
According to the Quantity Theory of Money (QTM), a permanent change in velocity leads to a proportional change in the price level in the long run. The QTM states that MV=PY, where M is money supply, V is velocity, P is price level, and Y is real output. Assuming Y is fixed at full employment and M is stable, changes in V directly impact P.
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