Causality is clear and mechanical with the quantity theory of money. If M increases because:
A) V and Q are variable, the price level, P, increases.
B) V and Q are variable, the price level, P, decreases.
C) V and Q are constant, the price level, P, increases.
D) V and Q are constant, the price level, P, decreases.
E) P and Q are constant, velocity, V, increases.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the amount of goods and services produced. If V and Q are constant, an increase in M will lead to an increase in P. Therefore, the correct answer is C.

Causality Is Clear and Mechanical with the Quantity Theory of Money