According to the quantity theory of money, an increase in GDP ________ inflation, and the Phillips curve demonstrates that inflation ________ with rising GDP. This is because the quantity theory is a ________ theory of price behavior.
A) reduces; increases; long-run
B) raises; decreases; short-run
C) has zero influence on; decreases; money-neutral
D) raises; increases; short-run
E) reduces; does not move; Keynesian

Question

Quizplus · Accepted Answer

The quantity theory of money posits that an increase in GDP will lead to inflation. The Phillips curve demonstrates that inflation decreases with rising GDP, which indicates a short-run relationship between these two variables. Thus, the best choice is A, as it reflects the predicted outcomes of both theories and characterizes the quantity theory as a theory of long-run price behavior.

According to the Quantity Theory of Money, an Increase in GDP