Mainstream economists contend that the 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 breaks down because velocity is more variable and unpredictable than expected. While some of the other options may be true to an extent, velocity is seen as the primary reason why the equation of exchange cannot be used as a reliable policy rule.

Mainstream Economists Contend That the a Policy Rule Based on the Equation