The "quantity theory of money" was employed by Classical macroeconomists to predict changes in the price level.Changes in P were forecast to be
A)proportional to changes in the money supply.
B)inversely proportional to changes in velocity.
C)proportional to changes in natural real GDP.
D)inversely proportional to changes in real GDP.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the price level (P) is directly proportional to the money supply (M). This is represented by the equation: MV=PY, where M is the money supply, V is the velocity of circulation of money, P is the price level, and Y is real output or real GDP. Therefore, changes in P are forecast to be proportional to changes in the money supply, making option A the correct answer.

The "Quantity Theory of Money" Was Employed by Classical Macroeconomists