According to the quantity theory of money, nominal GDP will ________ if the money supply ________.
A) fall by 50%; rises by 50%
B) rise by 50%; falls by 50%
C) double; doubles
D) rise by 100%; falls by 50%

Question

Quizplus · Accepted Answer

The quantity theory of money states that the price level is directly proportional to the amount of money in circulation. Therefore, if the money supply doubles, the price level should also double, resulting in a doubling of nominal GDP. Conversely, if the money supply falls by 50%, we would expect to see a similar decrease in nominal GDP. Choice A and D are incorrect because they have conflicting relationships between nominal GDP and the money supply. Choice B is incorrect because it implies that nominal GDP and the money supply have an inverse relationship, which is not supported by the quantity theory of money.

According to the Quantity Theory of Money, Nominal GDP Will