According to the quantity theory of money, the price level is:
A) exogenous.
B) determined by the money supply only.
C) determined by the ratio of the effective quantity of money to the volume of goods.
D) indeterminate in the long run.
E) determined by the volume of goods produced.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the price level is determined by the ratio of the effective quantity of money (or money supply adjusted for velocity of circulation) to the volume of goods. This means that an increase in the money supply relative to the volume of goods will lead to an increase in the price level, while a decrease in the money supply relative to the volume of goods will lead to a decrease in the price level. Therefore, the quantity theory of money emphasizes the importance of the relationship between the money supply and real economic variables such as output, rather than viewing the money supply as the sole determinant of the price level.

According to the Quantity Theory of Money, the Price Level