The quantity theory of money states explicitly that the:
A) value of money is determined by the overall quantity of money in existence.
B) Real GDP is determined by the money supply.
C) money supply is determined by the price level.
D) there is no relationship between the value of money and the quantity of money in existence.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the value of money is determined by the overall quantity of money in existence. This is expressed as the equation MV = PQ, where M is the money supply, V is the velocity of money (how quickly it circulates), P is the price level, and Q is real GDP. This equation can be rearranged to show that the price level (P) is directly proportional to the money supply (M), meaning that an increase in the money supply will lead to an increase in the price level, and vice versa.

The Quantity Theory of Money States Explicitly That The