According to the monetarist school of thought, which statement is false?

• A. Velocity is a function of the interest rate.
• B. Broadly speaking, the monetarist assumption regarding velocity suggests that a percentage change in money supply will result in an equivalent percentage change in nominal GDP.
• C. If the money stock doubles from one period to the next and GDP remains constant, the price level will double.
• D. Measured M2 velocity since the 1970s contradicts the assumption of velocity being constant.

Answer: (A)

In monetarist theory, the key relationship is MV = PY, where velocity is treated as relatively stable over the short run. The idea is that changes in the money stock affect nominal GDP mainly because velocity doesn’t swing wildly with every rate move; a rise in M, with V roughly constant, translates into a proportional rise in nominal GDP (P×Y).

The statement that velocity is a function of the interest rate is not how monetarists view velocity. They do not see the interest rate as driving velocity in a primary way, so that claim is false.

The other points line up with the usual monetarist intuition. If M grows and V and Y are unchanged, the price level must adjust to keep the equation balanced, so doubling M (with constant V and Y) implies P doubles. And while measured M2 velocity has varied since the 1970s, it is common in practice to treat velocity as relatively stable for the purpose of the simple money-supply and price-level intuition.