The quantity theory of money implies that a 3% increase in the money supply will eventually cause
A) a 3% increase in real GDP.
B) a 3% increase in disposable income.
C) a 3% increase in the price level.
D) a 3% decrease in the unemployment rate.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the general price level in an economy is directly proportional to the money supply, assuming that the velocity of money and real output remain constant. Therefore, a 3% increase in the money supply will eventually cause a 3% increase in the price level. This is represented by the equation MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output.

The Quantity Theory of Money Implies That a 3% Increase