Which of the following best describes the view that velocity tends to be stable over time, supporting a predictable link between money and prices?

• A. Velocity is highly volatile and unpredictable.
• B. Velocity is relatively stable over long periods.
• C. Velocity is entirely determined by fiscal policy.
• D. Velocity is irrelevant to money supply changes.

Answer: (B)

The main idea is that velocity of money—the rate at which money circulates in the economy—tends to be stable over long periods, which makes the relationship between money and prices more predictable. In the quantity theory of money, MV = PY, where M is the money stock, V is velocity, P is the price level, and Y is real output. If V stays relatively constant over time, a change in the money supply M translates into a proportional change in nominal spending (P×Y). Since real output Y grows slowly and steadily, most of the effect shows up as the price level rising or falling, giving a stable link between how much money there is and how high prices go. If velocity were highly volatile, changes in money could lead to unpredictable swings in inflation, breaking that predictable connection. Velocity isn’t dictated solely by fiscal policy; it reflects a mix of financial conditions, technology, and spending habits, and it matters for how money supply changes influence prices. So the view captured here is that velocity is relatively stable over long periods.