According to the quantity theory of money, a 25 percent change in M, the quantity of money, leads to a 25 percent change in
A) V, the velocity of circulation.
B) P, the price level.
C) Y, real GDP.
D) R, the interest rate.

Question

Quizplus · Accepted Answer

The quantity theory of money, often represented by the equation MV = PY, where M is the quantity of money, V is the velocity of circulation, P is the price level, and Y is real GDP, suggests that a change in the quantity of money (M) directly affects the price level (P) if the velocity of circulation (V) and real GDP (Y) are held constant. Therefore, a 25 percent change in M would lead to a 25 percent change in P, the price level, according to this theory.

According to the Quantity Theory of Money, a 25 Percent