When the velocity of money and real GDP are fixed, increases in the money supply:
A) result in lower velocity.
B) are impossible because the money supply must also be fixed.
C) must cause decreases in the price level.
D) must cause increases in the price level.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, when the velocity of money and real GDP are fixed, increases in the money supply lead to proportionate increases in the price level. This is because there is more money chasing the same quantity of goods and services, which drives up their prices.

When the Velocity of Money and Real GDP Are Fixed