Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:
A) 10%.
B) 50%.
C) 100%.
D) 200%.

Question

Quizplus · Accepted Answer

The quantity theory of money states that MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output (real GDP). Given that real GDP and velocity of money remain constant, we can assume QV is constant. If M doubles, then PQ must also double to maintain the equation. This means that the price level (inflation) must double as well, resulting in a 100% increase. Therefore, the correct answer is C) 100%.

Suppose Real GDP and Velocity of Money Remain Constant