If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that:
A) changes in the money growth rate lead one-for-one to changes in the inflation rate in the long run
B) changes in the money growth rate lead one-for-one to changes in the inflation rate but only in the short run
C) changes in velocity lead one-for-one to changes in the inflation rate
D) changes in the money growth rate lead to a greater than one-for-one change in the inflation rate in the long run
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

The quantity theory of money states that in the long run, changes in the money supply lead to proportional changes in the price level. Since long-run real GDP growth is determined by real changes in the economy, any changes in the money growth rate will lead to equivalent changes in the inflation rate in the long run. Therefore, option A is the correct answer. Option B is incorrect because the quantity theory of money applies to long-run changes, not short-run changes. Option C is incorrect because velocity is not directly related to the quantity theory of money. Option D is incorrect because the quantity theory of money predicts a one-for-one relationship between changes in the money supply and changes in the price level, not a greater than one-for-one relationship.

If Long-Run Real GDP Growth Is Determined by Real Changes