Suppose monetary neutrality holds and velocity is constant. A 5 percent increase in the money supply
A)Increases the price level by more than 5 percent.
B)increases the price level by 5 percent.
C)increases the price level by 5 percent
D)does not change the price level.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If velocity is constant and monetary neutrality holds, then any increase in the money supply must lead to a proportionate increase in the price level. Therefore, a 5 percent increase in the money supply will lead to a 5 percent increase in the price level.

Suppose Monetary Neutrality Holds and Velocity Is Constant