According to the quantity theory of money, an increase in the quantity of money
A) increases average prices.
B) does not change velocity.
C) increases nominal GDP.
D) does not change real GDP.
E) does all of the above.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the nominal value of output is determined solely by the quantity of money. An increase in the quantity of money leads to an increase in nominal GDP as there is more money to spend on goods and services. This increase in the money supply leads to an increase in average prices as consumers have more money to spend, driving up demand and ultimately prices. Since an increase in the quantity of money does not increase real output, it does not change the real GDP. Finally, the velocity of money (the rate at which money is exchanged in the economy) is assumed to be constant in the quantity theory of money, so it does not change with an increase in the quantity of money. Therefore, the correct answer is E as all of the above are true.

According to the Quantity Theory of Money, an Increase in the Quantity