According to the quantity theory of money, if M's growth is lower than Q's, then:
A) V falls.
B) V rises.
C) P stays the same.
D) P falls.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation of exchange can be given as MV=PT where M is the money supply, V is the velocity of money, P is the price level, and T is the level of transactions. If the growth rate of money supply (M) is lower than the growth rate of output (Q), then the velocity of money (V) must fall to compensate for the lower growth rate of M so as to keep the equation balanced. As V falls, the price level (P) must also fall to maintain the equality between MV and PT. Therefore, the correct answer is D- P falls.

According to the Quantity Theory of Money, If M's Growth