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LOS i: Discuss the quantity theory of money and its relation to aggregate supply and aggregate demand.

A)	money supply multiplied by velocity equals real output.

B)	a decrease in the money supply will cause a proportional increase in prices.

C)	an increase in the money supply will cause a proportional increase in prices.

The quantity theory is in no way related to fiscal policy. Money supply multiplied by velocity must equal nominal gross domestic product (GDP).

Which of the following statements is least accurate? According to the quantity theory of money:

A)	velocity and real output are not determined by the money supply.

B)	velocity is determined by institutional factors.

C)	the price level is equal to the quantity of output divided by the money supply.

The equation of exchange states that MV = PY, so P = MV/Y.

Both remaining statements are true. According to the quantity theory of money, an increase in the money supply will cause a proportionate increase in prices, while velocity and real output are determined by institutional factors and are independent of the money supply.

Which of the following relationships in regard to the equation of exchange is least accurate?

A)	Money × Velocity = Money Supply × Velocity.

B)	Nominal GDP = Price × Money Supply.

C)	Nominal GDP = Money Supply × Velocity = Price × Real Output.

The equation of exchange holds that: Money Supply × Velocity = Nominal GDP = Price × Real Output.

Which of the following is the most accurate definition of the velocity of money? The velocity of money is the:

A)	GDP of a country divided by its price level.

B)	GDP of a country divided by its money supply.

C)	money supply of a country divided by its price level.

Velocity is the average number of times per year each dollar is used to buy goods and services (velocity = nominal GDP / money). Therefore, the money supply multiplied by velocity must equal nominal GDP. The equation of exchange must hold with velocity defined in this way. Letting money supply = M, velocity = V, price = P, and real output = Y, the equation of exchange may be symbolically expressed as: MV = PY.