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    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?
    A A permanent change in velocity leads to a proportional change in the price level. Correct Answer Incorrect Answer
    B A change in velocity has no long-run effect on the price level. Correct Answer Incorrect Answer
    C A change in velocity leads to a proportional change in output in the long run. Correct Answer Incorrect Answer
    D A change in velocity affects only the nominal interest rate in the long run. Correct Answer Incorrect Answer

    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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