Economics • Economic BasicsMedium
What does the 'Quantity Theory of Money', expressed by Irving Fisher's equation of exchange (MV = PT), fundamentally assert?
A. Changes in the velocity of money have no impact on price levels.
B. There is a direct proportional relationship between the money supply and the general price level.✓ Correct Answer
C. Interest rates are solely determined by the demand for money.
D. Real output is entirely independent of nominal money supply in both the short and long run.
💡 Solution & Explanation
The Quantity Theory of Money, represented by Irving Fisher's equation, asserts that money supply changes have a direct proportional impact on the general price level under constant velocity and output assumptions. Alternative views focus on interest rates or short-run output deviations, which differ from classical monetary neutrality.
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