According to the quantity theory of money,if both the growth rate of the money supply and the velocity of money are fixed,then a higher inflation rate means:
A) a higher real growth rate.
B) no change in the real growth rate.
C) a lower real growth rate.
D) a higher or lower real growth rate,depending on the specific growth rate of the money supply.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation of exchange is MV=PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. Assuming that V is fixed, an increase in M will lead to an increase in P. Therefore, a higher inflation rate (increase in P) will mean a lower real output (Y) or real growth rate, as represented by the equation Y = PY/MV. Therefore, the correct choice is C, a lower real growth rate.

According to the Quantity Theory of Money,if Both the Growth