Question 17

The equation of exchange is defined by the quantity of money multiplied by the number of times this money is spent in a given year must equal nominal income.

The equation of exchange is represented by the formula MV = PQ, where M is the quantity of money, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced. Therefore, the correct statement is that the quantity of money multiplied by the number of times this money is spent in a given year must equal nominal income.

A) Velocity of demand multiplied by the number of times this money is spent in a given year must be larger than nominal income

This option incorrectly suggests that the velocity of demand is a critical factor in determining the equation of exchange. The equation actually defines a relationship of equality between the quantity of money and nominal income, not a greater-than relationship.

B) Quantity of money multiplied by the number of times this money is spent in a given year must be larger than nominal income

This option misrepresents the equation of exchange by asserting that the product must be larger than nominal income. The correct relationship indicates that the quantity of money and its velocity must satisfy an equality with nominal income.

C) Velocity of demand multiplied by the number of times this money is spent in a given year must equal nominal income

While this option includes the concept of equality, it inaccurately employs the term "velocity of demand" instead of referring directly to the quantity of money. The equation of exchange is specifically about the quantity of money and its velocity, not solely the velocity of demand.

D) Quantity of money multiplied by the number of times this money is spent in a given year must equal nominal income

This statement accurately reflects the equation of exchange, where the product of the quantity of money and its velocity directly correlates to nominal income. This is the fundamental definition of the equation of exchange in economics.

Conclusion

The correct answer, D, accurately describes the equation of exchange by establishing the equality between the quantity of money and nominal income. All other options either misinterpret the relationship or incorrectly define the terms involved, failing to capture the essence of this foundational economic concept.