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

Question

Quizplus · Accepted Answer

The quantity theory of money states that in the long run, an increase in the quantity of money will lead to an equal percentage increase in the price level. This is known as the quantity theory of inflation. It is based on the idea that if the money supply increases faster than the output of goods and services in an economy, there will be more money chasing the same amount of goods, leading to higher prices.

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