Suppose that the money supply increases by 20 percent.What does the quantity theory of money tell us must happen to real GDP?
A) It must increase by more than 20 percent.
B) It must increase by less than 20 percent.
C) It must increase by exactly 20 percent.
D) None of the above are correct.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that an increase in the money supply, if velocity is constant and the economy is at full employment, primarily affects the price level rather than real GDP. Thus, none of the given options about real GDP necessarily follow from an increase in the money supply according to this theory.

Suppose That the Money Supply Increases by 20 Percent