Mainstream economists contend that a policy rule based on the equation of exchange breaks down because
A) there is a tight relationship between the money supply and nominal GDP.
B) velocity is more variable and unpredictable than expected.
C) the money supply increases at a constant, not a variable, rate.
D) nominal GDP is directly related to changes in the price level.

Question

Quizplus · Accepted Answer

Mainstream economists argue that the equation of exchange (MV = PQ) cannot reliably guide monetary policy because velocity (V) is more variable and unpredictable than expected. This means that changes in the money supply (M) do not have a proportional effect on nominal GDP (PQ) as suggested by the equation, and that attempts to adjust the money supply to achieve a specific level of nominal GDP could end up doing more harm than good.

Mainstream Economists Contend That a Policy Rule Based on the Equation