Cutting the money supply by one-third is predicted by the quantity theory of money to cause
A)a sharp decline in real output of one-third in the short run,and a fall in the price level by one-third in the long run.
B)a decline in real output by one-third.
C)a decline in output by one-sixth,and a decline in the price level of one-sixth.
D)a decline in the price level by one-third.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply. Therefore, a one-third cut in the money supply is predicted to cause a one-third decline in the price level in the long run. This is because the quantity of money available to purchase goods and services is reduced, leading to deflationary pressures. There is no direct impact on real output, so options A and B are incorrect. Option C is also incorrect as it implies a decline in output in addition to the decline in the price level, which is not predicted by the quantity theory of money.

Cutting the Money Supply by One-Third Is Predicted by the Quantity