According to the quantity theory of money,
A) a decrease in the quantity of money will decrease the price level.
B) a decrease in the quantity of money will decrease the velocity of circulation.
C) an increase in the quantity of money will decrease real GDP.
D) an increase in the quantity of money will increase real GDP.

Question

Quizplus · Accepted Answer

The quantity theory of money states that there is a direct relationship between the quantity of money in circulation and the price level. Therefore, a decrease in the quantity of money will decrease the price level. Option B is incorrect because the velocity of circulation is not directly impacted by the quantity of money but rather by consumer behavior. Option C is incorrect because an increase in the quantity of money could actually lead to an increase in real GDP, as long as it is accompanied by an increase in productivity and investment. Option D is also incorrect for the same reason.

According to the Quantity Theory of Money