If the velocity of money and real GDP are fixed, then the quantity theory of money implies that the price level will:
A) increase at a lower rate than the growth in the money supply.
B) increase at the same rate as the growth in the money supply.
C) increase at a higher rate than the growth in the money supply.
D) be unrelated to the growth in the money supply.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. If V and Y are fixed, then any increase in M will result in an equal increase in P to maintain the equation. Therefore, the price level will increase at the same rate as the growth in the money supply.

If the Velocity of Money and Real GDP Are Fixed