According to the quantity theory of money, if an economy produces 5,000 units of output, its money supply equals $40,000 and the velocity of money equals one, then the price level will equal:
A) $0.13.
B) $1.25.
C) $8.
D) $200.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, 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 output. Solving for P, we get P = MV/Q. Plugging in the given values, we get P = ($40,000 x 1)/5,000 = $8. Therefore, the answer is (C) $8.

According to the Quantity Theory of Money, If an Economy