According to the quantity theory of money,if the money supply is increased by 1.5 times while velocity remains constant,the new price level will:
A)fall to half its initial level.
B)fall, but it will not fall all the way to half its initial level.
C)increase, but it will not double.
D)increase by 1.5 times.
E)more than double.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation for the price level is MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is the level of real output. If M is increased by 1.5 times while V remains constant, then MV increases by 1.5 times. If Y and V remain the same, then PY must also increase by 1.5 times. Therefore, the new price level will increase by 1.5 times. Option D is the correct choice as it states the new price level will increase by 1.5 times.

According to the Quantity Theory of Money,if the Money Supply