The equation of exchange, M×V=P×Q , relates to the quantity theory of money. In this equation, M represents the supply of money,
V represents the velocity of money, P represents the price level, and Q is real output. Which of the statements describes an implication of this equation in the long run?
Money supply increases (ΔM) will directly increase real GDP.
Changes in the money supply (ΔM) will balance out with changes in prices (ΔP) .
Changes in the money supply (ΔM) will balance out with changes in velocity (ΔV) .
Both money supply (M) and money velocity (V) are held constant.
Changes in the money supply (ΔM) will balance out with changes in prices (ΔP)
The classical viewpoint of the quantity theory of money is that in the long run, assuming full employment, money velocity in real output are fixed. As these are on either side of the equation, the key inside of the quantity theory of money is that any increases or decreases in the supply of money on the left hand side of the equation will balance out with changes in prices on the right hand side of the equation. That is, in the long run, increasing the money supply causes inflation.
Changes in the money supply (ΔM) will balance out with changes in prices (ΔP)
The classical viewpoint of the quantity theory of money is that in the long run, assuming full employment, money velocity in real output are fixed. As these are on either side of the equation, the key inside of the quantity theory of money is that any increases or decreases in the supply of money on the left hand side of the equation will balance out with changes in prices on the right hand side of the equation. That is, in the long run, increasing the money supply causes inflation.
