If the demand for money depends on the interest rate the velocity of circulation is ?
Correct answer: C. not constant and the quantity theory of money does not hold.
- A. not constant and the quantity theory of money does hold.
- B. constant and the quantity theory of money does hold.
- C. not constant and the quantity theory of money does not hold.
- D. constant and the quantity theory of money does not hold.
Explanation
When money demand varies with the interest rate, velocity also varies because velocity is linked to the public’s demand for money. The simple quantity theory assumes stable velocity, so that version does not hold.
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