According to the quantity theory of money, if the money supply increases by 5%, the price...

According to the quantity theory of money, if the money supply increases by 5%, the price level

falls by 5%.
		does not change.
		rises by 5%.
		rises by more than 5%.

Solutions

Expert Solution

Ans. Option Rises by 5%

According to quantity theory of money,

Money Supply * Velocity of money = Price Level * Real Output

=> M*V = P*Y

Using natural log, Ln on both sides and differentiating with respect to time period, t, we get,

%Change in money supply + %Change in velocity of money = %Change in price level + %Change in real output

=> Thus, with 5% increase in money supply, keeping everything else constant, there will be a 5% increase in price level.
Thank you

Rahul Sunny answered 1 year ago

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