The equation specifying a direct relationship between the money supply and prices is the quantity theory of:
A) money.
B) prices.
C) exchange.
D) spending.
E) dollars.

Question

Quizplus · Accepted Answer

The quantity theory of money establishes that the money supply in an economy is proportional to the price level of goods and services. In other words, an increase in the money supply will cause a proportional increase in prices, assuming all else remains constant. Therefore, the direct relationship between the money supply and prices is best captured by the quantity theory of money.

The Equation Specifying a Direct Relationship Between the Money Supply