The long-run relationship between money growth, income growth, and the change in the price level in a nation is:
A) money growth = real income growth - change in the price level.
B) real income growth - money growth = change in the price level.
C) change in the price level = money growth - real income growth.
D) real income growth/change in the price level = money growth.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the long-run relationship between money growth, income growth, and the change in the price level in a nation is expressed as: MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output (income). Rearranging this equation, we get: M/V = PY. Assuming that V and Y are relatively stable and not significantly affected by changes in the money supply in the long run, we can simplify the equation to: %ΔM - %ΔP = %ΔY. This implies that the percentage change in the money supply minus the percentage change in the price level is equal to the percentage change in real output (income). Rearranging this equation, we get: %ΔY = %ΔM - %ΔP, which is equivalent to option B.

The Long-Run Relationship Between Money Growth, Income Growth, and the Change