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**CFA Practice Question**

The equation of exchange hypothesized by the quantity theory of money indicates that:

II. Velocity is equal to money supply divided by nominal GDP.

III. Rate of inflation + Growth rate of money supply = Growth rate of real output + Growth rate of velocity

I. MY = PV

II. Velocity is equal to money supply divided by nominal GDP.

III. Rate of inflation + Growth rate of money supply = Growth rate of real output + Growth rate of velocity

A. I only

B. II and III.

C. none of them is correct.

**Explanation:**Th equation of exchange is MV = PY.

or: Rate of inflation + Growth rate of real output = Growth rate of money supply + Growth rate of velocity

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**User Contributed Comments**
6

User |
Comment |
---|---|

KD101 |
If I is incorrect then III is too |

dimanyc |
KD101, good point. If I is incorrect, then III is incorrect and, therefore, II is incorrect. Easy question :) |

jpducros |
Remember : MoVe is the PrioritY ! => M * V= P * Y |

MaresaJaden |
Nice jpducros |

Mikehuynh |
Equation of exchange: MV=PY => M = PY/V In the long run as V and Y are fixed, increase in M will lead to increase in P |

CalebMast |
@jpducros - helpful. Thank you. |