The quantity theory of money ________.
A)is used by classical economists to explain how frequent changes in velocity lead to infrequent changes in the price level
B)gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply
C)implies that changes in the money supply never have an impact on real variables
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The quantity theory of money posits that changes in the money supply will proportionally affect the price level, assuming that velocity and real output remain constant. Consequently, this theory provides a theoretical basis for the idea that a central bank can impact inflation through adjustments to the money supply. Option A is incorrect because the quantity theory does not discuss changes in the velocity of money. Choice C is incorrect because the quantity theory does suggest that changes in the money supply will have an impact on nominal variables.

The Quantity Theory of Money ________