Question

In the simple quantity theory of money, Real GDP and velocity are assumed to be constant O O a. True b. False

Answer 1

Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another. When there is a change in the supply of money, there is a proportional change in the price level and vice-versa.

It is given by

M*V= P*Y

where,

M = Money supply

V = Velocity of money

P = Price level

Y = Real GDP

So velocity and Real GDP become constant so that price and money supply will have positive relationship .

So above statement is TRUE.