According to the quantity theory of money, the Fed could combat inflation by:
A) decreasing the supply of money.
B) increasing the supply of money.
C) reducing taxes.
D) increasing taxes.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, inflation is primarily caused by an increase in the supply of money relative to the supply of goods and services. Therefore, decreasing the supply of money would combat inflation by reducing the amount of money chasing after the same amount of goods and services, resulting in a decrease in the overall price level.

According to the Quantity Theory of Money, the Fed Could