Causality is clear and mechanical with the quantity theory of money. If M increases because:
A) V and Q are variable, the price level, P, increases.
B) V and Q are variable, the price level, P, decreases.
C) V and Q are constant, the price level, P, increases.
D) V and Q are constant, the price level, P, decreases.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if the quantity of money (M) increases and the velocity of money (V) and the level of real output (Q) are constant, then the price level (P) will increase proportionally to the increase in M. Thus, the correct answer is C, where V and Q are constant, and an increase in M will lead to an increase in P.

Causality Is Clear and Mechanical with the Quantity Theory of Money