If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in which of the following?
A)real output
B)both real and nominal interest rate
C)inflation rate
D)the price level

Question

Quizplus · Accepted Answer

If money is neutral (meaning that it does not have any impact on real variables such as output or employment) and velocity is stable (meaning that the rate at which money changes hands in the economy is constant), then an increase in the money supply will lead to a proportional increase in the price level through the quantity theory of money. In other words, if the money supply doubles while velocity and real output remain unchanged, the price level will also double. Therefore, the correct answer is D, the price level.

If Money Is Neutral and Velocity Is Stable, an Increase