ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the same proportionate fall in price (P).
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a smaller proportionate change in price (P).
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the the same proportionate change in price (P).
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the same proportionate increase in price (P).
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Detailed explanation-1: -Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference.
Detailed explanation-2: -If velocity is constant, its growth rate is zero and the growth rate in the money supply will equal the inflation rate (the growth rate of the GDP deflator) plus the growth rate in real GDP.
Detailed explanation-3: -An increase in the money supply results in a decrease in the value of money because an increase in the money supply also causes the rate of inflation to increase. As inflation rises, purchasing power decreases.
Detailed explanation-4: -The QTM states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. For example, if the amount of money in an economy doubles, QTM predicts that price levels will also double.