Answer to Question #272369 in Macroeconomics for Saman Khalil

Question

Classical economists assumed that velocity was stable in the short run. But

suppose that, because of a change in the payments mechanism—for example,

greater use of credit cards—there was an exogenous rise in the velocity of money.

What effect would such a change have on output, employment, and the price level

within the classical model?

Answer 1

If the money supply M grows, then with the stability of the velocity of circulation of money V, either prices P or the volume of production Y change in value terms