Which of the following is a feature of the Quantity Theory of Money in its classical form?
A. Velocity of money is variable and unstable
B. Output is determined by aggregate demand
C. Interest rates determine money demand only
D. Money supply determines the price level assuming full employment and constant velocity
Answer: Option D
Solution (By JKSSB Mock Tests)
In the classical Quantity Theory (MV = PT), with V and T assumed constant and full employment, changes in money supply (M) lead to proportional changes in the price level (P).
Explanation:
First-generation speculative-attack models show that an inconsistent policy mix (e.g., persistent money-financed deficits under a fixed exchange rate) leads to a sudden attack that exhausts reserves and forces abandonment of the peg.
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