According to the assumptions of the quantity theory of money,if the money supply increases 5 percent,then
A)both the price level and real GDP would rise by 5 percent.
B)the price level would rise by 5 percent and real GDP would be unchanged.
C)the price level would be unchanged and real GDP would rise by 5 percent.
D)both the price level and real GDP would be unchanged.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply, assuming a constant velocity of money and a constant level of real output. Therefore, if the money supply increases by 5 percent, the price level would rise by 5 percent. On the other hand, real GDP would be unchanged because it is assumed that the level of output is determined by factors such as technology, labor, and capital, which are independent of the money supply.

According to the Assumptions of the Quantity Theory of Money,if