According to the quantity theory of money, a decrease in the quantity of money causes
A) both average prices and real GDP to decrease.
B) average prices to decrease but nominal GDP to increase.
C) both average prices and nominal GDP to increase.
D) both average prices and nominal GDP to decrease.
E) average prices to decrease but nominal GDP will stay constant.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the decrease in the quantity of money will lead to a decrease in both average prices and nominal GDP. This is because the money supply is directly proportional to both prices and GDP, and a decrease in the quantity of money will lead to a decrease in both. Real GDP remains unchanged because it is not affected by changes in the money supply, only changes in productivity and inputs.

According to the Quantity Theory of Money, a Decrease in the Quantity