If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that changes in:
A) the money growth rate lead one-for-one to changes in the inflation rate in the long run.
B) the money growth rate lead one-for-one to changes in the inflation rate, but only in the short run.
C) velocity lead one-for-one to changes in the inflation rate.
D) the money growth rate lead to a greater than one-for-one change in the inflation rate in the long run.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that in the long run, a change in the money supply leads to a proportional change in the price level (inflation rate), assuming velocity of money and real output are constant. This implies a one-for-one relationship between changes in the money growth rate and changes in the inflation rate in the long run.

If Long-Run Real GDP Growth Is Determined by Real Changes