During the 1980s, M1 doubled, and the price level increased about __________ percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, when the money supply increases, prices will also rise. The equation is MV = PQ, where M is the money supply, V is velocity of money, P is the price level, and Q is real output. If we assume that V and Q remain constant, then doubling M1 would lead to a doubling of prices. Therefore, the price level would increase by 100%. However, historical data suggests that the velocity of money and real output do not remain constant. During the 1980s, the velocity of money and real output increased, which mitigated the impact of the increase in M1 on prices. As a result, the price level increased by about 60%, making choice B the best answer.

During the 1980s, M1 Doubled, and the Price Level Increased