If the quantity theory of money is represented as % Change in M + % Change in V
ID: 1111979 • Letter: I
Question
If the quantity theory of money is represented as % Change in M + % Change in V = % Change in P + % Change in:
A) expansionary monetary policy will be inflationary if we assume that velocity is decreasing and real output Y is changing
A) expansionary monetary policy will be inflationary if we assume that velocity is decreasing and real output Y is changing
B) expansionary monetary policy can be inflationary if we assume that velocity and real output, Y, are unchanging. C) expansionary monetary policy can be inflationary if we assume that real output Y also increases in the same proportion as the money supply and velocity is unchanging. D) contractionary monetary policy can be inflationary if we assume that velocity and real output, Y, are unchanging.Explanation / Answer
Option (B).
In terms of % Change, Quantity theory states:
% Change in M + % Change in V = % Change in P (Inflation) + % Change in Y (Real GDP)
An expansionary monetary policy increases money supply, therefore % Change in M > 0.
If V and Y are unchanging, then % Change in V = % Change in Y = 0 and to satisfy the equation,
% Change in P > 0, therefore inflation is positive.