If the money supply grows 5 per cent, and real output grows 2 per cent, prices should rise by
A)5 per cent.
B)more than 5 per cent.
C)less than 5 per cent.
D)None of these answers.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the percentage change in prices should be equal to the percentage change in the money supply minus the percentage change in real output. Therefore, the expected percentage change in prices would be 5% - 2% = 3%. Therefore, prices should rise by less than 5%.

If the Money Supply Grows 5 Per Cent, and Real