In an economy in which velocity is constant and the same level of real output is produced year after year,a slow increase in the money supply would result in a:
A)constant price level.
B)slowly increasing price level.
C)rapidly increasing price level.
D)slowly increasing real GDP.
E)rapidly increasing real GDP.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if velocity is constant and real output is constant, then an increase in the money supply will result in a proportional increase in the price level. Therefore, a slow increase in the money supply will result in a slowly increasing price level. The other options are incorrect because they do not reflect the relationship between the money supply and the price level, and real GDP is not affected by changes in the money supply in the long run.

In an Economy in Which Velocity Is Constant and the Same