Causality is clear and mechanical with the quantity theory of money. If M increases because V and Q are:
A) variable, the price level, P, increases.
B) variable, the price level, P, decreases.
C) constant, the price level, P, increases.
D) constant, the price level, P, decreases.

Question

Quizplus · Accepted Answer

The quantity theory of money, often represented as 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), suggests that if the money supply (M) increases while the velocity of money (V) and the quantity of goods and services (Q) are held constant, the price level (P) must increase. This is because more money is chasing the same amount of goods and services, leading to inflation.

Causality Is Clear and Mechanical with the Quantity Theory of Money