Taking the money supply to mean the effective supply of money in circulation (MV), choose the correct…
The effective supply of money over a period is the stock of money multiplied by the number of times each unit changes hands, MV. With the stock M given, a rise in velocity…
Choose your answer
Taking the money supply to mean the effective supply of money in circulation (MV), choose the correct response based on the following statements:
(i) Increase in the velocity of money increases the money supply
(ii) Increase in the velocity of money decreases the money supply
(iii) Decrease in the velocity of money increases the money supply
(iv) Decrease in the velocity of money decreases the money supply
Answer and explanation
Correct answer D
The effective supply of money over a period is the stock of money multiplied by the number of times each unit changes hands, MV. With the stock M given, a rise in velocity raises MV and a fall in velocity lowers it, so (i) and (iv) are correct. Statements (ii) and (iii) describe the opposite, inverse relation, which holds only for the quantity of money needed to carry a given value of transactions (M = PT/V), not for the money supply.
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Andhra Pradesh SET (APSET)