Economics • Economic BasicsMedium
What does the 'Quantity Theory of Money' (in its classical formulation, MV=PY) assert when velocity (V) and output (Y) are assumed constant in the short run?
A. Changes in the money supply lead to proportional changes in the price level.✓ Correct Answer
B. Interest rates are determined entirely by the demand for liquidity.
C. Employment levels are independent of nominal wage rates.
D. Fiscal deficits have no crowding-out effect on private investment.
💡 Solution & Explanation
The classical quantity theory of money posits that with constant velocity and output, any change in money supply translates directly into a proportional change in the price level. Alternative options describe Keynesian liquidity preference or classical labor market theories rather than monetary identity outcomes. Irving Fisher popularized this relationship through the equation of exchange.
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