The essence of the quantity theory of money is that:
A) the price level is indeterminate.
B) in the long run, the only determinant of the price level is the money supply.
C) in the long run, a key determinant of the price level is the money supply.
D) only the central bank knows what the price level is.
E) money cannot pin down the price level.

Question

Quizplus · Accepted Answer

The quantity theory of money holds that in the long run, a key determinant of the price level is the money supply. This is based on 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 the level of real output. In the long run, the velocity of money and the level of real output are assumed to be relatively fixed, so changes in the money supply are believed to result in changes in the price level. Therefore, the quantity theory of money suggests that controlling the money supply is a key tool for controlling inflation in the long run.

The Essence of the Quantity Theory of Money Is That