The quantity theory of money asserts that an increase in the quantity of money
A) will decrease the price level by an offsetting amount.
B) by n percent will lead to an increase in the price level by n + 1 percent.
C) will lead to an equal percentage increase in real GDP.
D) will lead to an equal percentage increase in the price level.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that an increase in the quantity of money in an economy will lead to a proportional increase in the price level, assuming velocity of money and real output remain constant. This is encapsulated in the equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP).

The Quantity Theory of Money Asserts That an Increase in the Quantity