The quantity theory of money addresses the
A) determinants of potential GDP.
B) short-run effect the quantity of money has on the price level.
C) determinants of the equilibrium unemployment rate.
D) long-run effect the quantity of money has on the price level.

Question

Quizplus · Accepted Answer

The quantity theory of money addresses the long-run effect the quantity of money has on the price level. It states that in the long run, the price level will increase proportionally with the quantity of money in circulation. This relationship is expressed as 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 sold. By manipulating this equation, economists can analyze the relationship between changes in the money supply, changes in the price level, and changes in real output.

The Quantity Theory of Money Addresses the