According to the quantity theory of money, when the money supply doubles, which variable doubles?
A) the price level
B) the velocity of money
C) the real GDP
D) the real wage rate

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation of exchange is MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. If the money supply (M) doubles and the velocity of money (V) remains constant, then PY must also double in order for the equation to remain true. Since Y (real GDP) is determined by the economy's resources and technology in the long run, it is unlikely to double immediately. Therefore, the price level (P) must double to balance the equation.

According to the Quantity Theory of Money, When the Money