Question

Given the equation of exchange set forth by the quantity theory of money (M×V=P×Q) , where M is the supply of money, V is the velocity of money, P is the price level, and Q is real output, which of the statements best defines V ?
The average of level of prices for a given basket of goods.

The quantity of goods and services produced within an economy.

The average number of times a dollar is spent in a given period of time.

The total amount of currency, coins, and banking sector.

Answer 1

The average number of times a dollar is spent in a given period of time.

Each aspect of the equation describing the quantity theory of money must be clearly defined. The money supply is the total of money (in currency, coins, and the banking system) in circulation. The velocity of money refers to the average number of times a dollar is circulated in a year. P and Q describe the overall levels of prices in the production of an economy, respectively. P times Q represents real GDP.