The quantity theory of money concludes that an increase in the money supply causes a proportional
A)increase in prices.
B)increase in real output.
C)decrease in velocity.
D)increase in velocity.
E)decrease in prices.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the level of prices in an economy is directly proportional to the amount of money in circulation. Therefore, an increase in the money supply results in an increase in prices. Choice B is incorrect because the quantity theory of money assumes that the economy is operating at full capacity, so an increase in the money supply does not result in an increase in real output. Choices C, D, and E are also incorrect as they do not reflect the conclusions of the quantity theory of money.

The Quantity Theory of Money Concludes That an Increase in the Money