According to the quantity theory of money, a nation that increases its money supply by 30 percent should expect its price level to increase by approximately
A) 15 percent.
B) 30 percent.
C) 45 percent.
D) 60 percent.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the price level is directly proportional to the money supply. The equation is P = MV/Y, where P is the price level, M is the money supply, V is the velocity of money, and Y is the real output of goods and services. If the money supply increases by 30 percent, and assuming velocity and real output stay constant, the price level should increase by the same percentage, or 30 percent. Therefore, the correct answer is B.

According to the Quantity Theory of Money, a Nation That