Question

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: A. short-run aggregate supply curve. B. long-run aggregate supply curve. C. price level in the short run. D. demand for real balances per unit of output.

Answer 1

Answer:

The correct answer is option D.

Explanation:

Irving Fisher gave the equation of quantity theory of money. This equation is thus also called the Fisher's equation. It can be stated as MV=PT.

Here, M is the money supply, V is the velocity of money circulation, P represents the price level, and T is the volume of transactions. V and T are assumed to be constant. On the basis of this assumption, we can say that there is a direct relationship between money supply and price level.  

The velocity of circulation is assumed to be constant, this assumption is equivalent to constant demand for real balances per unit. Velocity shows the number of times a currency changes hands. Constant velocity means money is not changing hands, people are holding money, or in other words, demand for real balances is constant.