In the long run, the quantity theory of money says that the growth rate of the money supply will be approximately equal to the:
A) velocity of money.
B) inflation rate.
C) price level.
D) growth rate of real GDP.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the nominal GDP (which is directly proportional to the money supply and velocity of money) is equal to the product of the price level and real GDP. Therefore, in the long run, an increase in the money supply will lead to an increase in the price level, causing inflation. So, the growth rate of the money supply is approximately equal to the inflation rate.

In the Long Run, the Quantity Theory of Money Says