The 'quantity theory of money' argues that an increase in the money supply at a rate that is faster than the rate of increase in real GDP will lead to an increase in the price level in the long run.

Question

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The quantity theory of money suggests that the general price level of goods and services in the economy is directly proportional to the amount of money in circulation. Therefore, an increase in the money supply, without corresponding increase in real GDP, would lead to an increase in the price level in the long run. This theory is based on the assumption that velocity of money and real output are constant, and there are no changes in the banking system or price expectations.

The 'Quantity Theory of Money' Argues That an Increase in the Money