If velocity and output were nearly constant,then
A)the inflation rate would be much higher than the money supply growth rate.
B)the inflation rate would be about the same as the money supply growth rate.
C)the inflation rate would be much lower than the money supply growth rate.
D)any of the above would be possible.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, MV = PQ where M is the money supply, V is the velocity of money, P is the price level and Q is the real output. If V and Q are nearly constant, then an increase in M would lead to an increase in P (inflation rate). However, if V and Q are constant, then changes in M would be reflected in the same proportionate changes in P, leading to a situation where the inflation rate would be about the same as the money supply growth rate. Therefore, choice B is the best answer.

If Velocity and Output Were Nearly Constant,then