ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An increase in the money supply ( M) without an increase in output ( Y) causes the price level to change by the same change in the money supply. In other words, output doesn’t change, but when the money supply doubles, the price level also doubles.

Detailed explanation-2: -According to the quantity theory of money, if the amount of money in an economy doubles, all else equal, price levels will also double. This means that the consumer will pay twice as much for the same amount of goods and services.

Detailed explanation-3: -The quantity theory of money states that the value of money is based on the amount of money in the economy. Thus, according to the quantity theory of money, when the Fed increases the money supply, the value of money falls and the price level increases.

Detailed explanation-4: -The quantity theory of money suggests that an increase in the money supply increases real output proportionately. If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

Detailed explanation-5: -An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending.