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