In the quantity theory of money:
A) the price level is a function of the supply of money.
B) the supply of money is a function of the price level.
C) the money supply and the price level are inversely related.
D) the money supply is controlled by the government.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the price level in an economy is directly proportional to the supply of money. This means that if there is an increase in the supply of money in the economy, the price level will also increase, and if there is a decrease in the supply of money, the price level will also decrease. Therefore, option A is correct. Option B is incorrect because the supply of money does not determine the price level, but rather the other way around. Option C is also incorrect because the quantity theory of money asserts that the money supply and the price level are directly related, not inversely related. Option D is also incorrect because the quantity theory of money does not advocate for government control over the money supply, but rather a laissez-faire approach to the economy.

In the Quantity Theory of Money