If the price level doubles,
A)the quantity demanded of money falls by half.
B)the value of money is cut by half.
C)nominal income is unaffected.
D)None of these answers.
E)the money supply has halved.

Question

Quizplus · Accepted Answer

When the price level doubles, the purchasing power of the currency decreases by half, meaning that the value of money is cut by half. This means that the same amount of money can only buy half the amount of goods and services it could before, leading to inflation. The quantity demanded of money may change, but it depends on various factors such as the interest rate, so option A is not always true. Nominal income may also be affected by inflation, so option C is not true in general. The money supply may or may not change, and it is not tied directly to the price level, so option E is not a certain consequence of a price level change.

If the Price Level Doubles