Which of the following is TRUE regarding the quantity theory of money?
I. The theory predicts that in the long run the inflation rate equals the money growth rate minus the
Growth rate of real GDP.
II. The theory predicts that countries with high growth rates of money will have high inflation rates.
III. The theory predicts that increases in the growth rate of the velocity of circulation lowers the
Inflation rate.
A) I and II
B) II and III
C) I and III
D) I, II and III

Question

Quizplus · Accepted Answer

I. The quantity theory of money, often represented by the equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the output of goods and services), indeed predicts that in the long run, the inflation rate (growth in P) is determined by the money growth rate (growth in M) minus the growth rate of real GDP (growth in Q), assuming velocity (V) is constant or changes predictably.II. It also predicts that countries with high rates of money supply growth will experience high inflation rates, assuming velocity and real GDP growth are relatively stable. This is because a larger money supply chasing the same amount of goods and services tends to increase prices.III. The theory does not necessarily predict that increases in the growth rate of the velocity of circulation lower the inflation rate. The effect of changes in velocity on inflation is more complex and depends on how it interacts with changes in the money supply and real GDP growth.

Which of the Following Is TRUE Regarding the Quantity Theory