The quantity theory of money implies that the price level will be stable (no inflation or deflation)when the growth rate of the money supply equals
A)0.
B)the growth rate of the price level.
C)the growth rate of the velocity of money.
D)the growth rate of real GDP.

Question

Quizplus · Accepted Answer

The quantity theory of money, often represented by the equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced), implies that the price level will be stable when the growth rate of the money supply equals the growth rate of real GDP. This is because, if the amount of money in the economy grows at the same rate as the economy itself, there should be no inflationary or deflationary pressure on prices, assuming velocity is constant.

The Quantity Theory of Money Implies That the Price Level