The quantity theory of money states that
A) inflation increases when the money growth rate increases.
B) as the price level increases, the demand for money increases.
C) as the interest rate rises, the demand for money decreases.
D) changes in the quantity of money are determined by the commercial banks and not the Federal Reserve.

Question

Quizplus · Accepted Answer

The quantity theory of money posits that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to this theory, if the amount of money in an economy grows at a faster rate than the economy's ability to produce goods and services, inflation will increase. This is because more money will be chasing the same amount of goods and services, leading to price increases.

The Quantity Theory of Money States That