Economics • Economic BasicsMedium
What does the 'Quantity Theory of Money' (MV = PT) imply in the long run?
A. Changes in money supply lead to proportional changes in the general price level.✓ Correct Answer
B. Changes in money supply only affect the real output of the economy.
C. Velocity of money is highly unstable.
D. Prices are completely independent of money supply.
💡 Solution & Explanation
The Quantity Theory of Money, represented by the equation MV = PT, asserts that changes in the money supply lead directly to proportional changes in the price level over the long run. Real variables like output remain unaffected by money supply changes in the long run according to monetary neutrality. Inflation is thus viewed primarily as a monetary phenomenon.
More Economics Economic Basics questions
- Which term describes the total monetary value of all final goods and services produced specifically within…
- Which of the following indices is widely used to measure the average change over time in the prices paid by…
- Which of the following defines 'Cross-Price Elasticity of Demand' for substitute goods?
- What does the term 'Disguised Unemployment' primarily imply in the context of an developing agrarian economy?
- What does the 'Laffer Curve' graphically demonstrate regarding taxation policy?