According to the quantity theory of money,if velocity is constant and real output grows at an average rate of 4 percent per year,a 4 percent average rate of growth in the money supply would result in
A)a constant price level.
B)a slowly increasing price level.
C)a rapidly increasing price level.
D)constant real GDP.
E)constant nominal GDP.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation of exchange is M x V = P x Y, where M is the money supply, V is velocity, P is the price level, and Y is real output. If velocity is constant and real output grows at an average rate of 4 percent per year, then a 4 percent average rate of growth in the money supply would result in a proportional increase in the price level. However, since we know that real output is growing at the same rate, the increase in the money supply would simply keep prices constant, resulting in a constant price level. Therefore, the correct answer is A) a constant price level.

According to the Quantity Theory of Money,if Velocity Is Constant