According to the quantity theory of money, increases in money lead to increases in
A) average prices.
B) velocity.
C) potential GDP.
D) real GDP.
E) unemployment.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, increases in the money supply will lead to increases in prices, as there is more money chasing the same amount of goods and services. This relationship is expressed as the equation: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output. If the money supply (M) increases and velocity (V) and output (Q) remain constant, then prices (P) will increase.

According to the Quantity Theory of Money, Increases in Money