In the long run, an increase in the money supply will cause prices:
A) to increase.
B) not to change.
C) to decrease.
D) to fluctuate up and then down.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the money supply will lead to an increase in aggregate demand for goods and services, causing prices to rise. This is represented by the equation MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output. If M increases, assuming all other variables remain constant, P must also increase to maintain the equation's equilibrium. Therefore, an increase in the money supply will cause prices to increase.

In the Long Run, an Increase in the Money Supply