The quantity theory of money concludes that an increase in the money supply causes

Question

a. a proportional decrease in prices.
b. a proportional increase in prices.
c. a proportional increase in velocity.
d. a proportional increase in real output.
e. a proportional decrease in velocity.

Answer 1

The quantity theory of money, which is often represented by the equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services), concludes that an increase in the money supply (M) leads to a proportional increase in prices (P), assuming that velocity (V) and output (Q) remain constant in the short run.

Therefore, the correct answer is:

b. a proportional increase in prices.