According to the quantity theory of money, which of the following best describes what determines the rate of inflation in the long run?

Choose 1 answer:
(A) The rate of change of the velocity of money
(B) The growth of the price level
(c) The growth of real GDP per capita
(D) The rate of growth of the money supply
(E) The rate of inflation is constant in the long run

Question

According to the quantity theory of money, which of the following best describes what determines the rate of inflation in the long run?

Choose 1 answer:
(A) The rate of change of the velocity of money
(B) The growth of the price level
(c) The growth of real GDP per capita
(D) The rate of growth of the money supply
(E) The rate of inflation is constant in the long run

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ According to the quantity theory of money, the equation of exchange is given by $ MV = PY $, where $ M $ is the money supply, $ V $ is the velocity of money, $ P $ is the price level, and $ Y $ is the real GDP. ‖ ‖ step 2 ⋮ In the long run, the velocity of money $ V $ and real GDP $ Y $ are assumed to be constant. Therefore, any change in the money supply $ M $ will directly affect the price level $ P $. ‖ ‖ step 3 ⋮ The rate of inflation is determined by the rate of growth of the money supply $ M $ because $ V $ and $ Y $ are constant. ‖ ***D*** ∻Key Concept∻ ⚹Rate of growth of the money supply⚹ ∻Explanation∻ ⚹In the long run, the rate of inflation is primarily determined by the rate of growth of the money supply, assuming the velocity of money and real GDP are constant.⚹◊What is the probability of selecting the correct answer to the question about the quantity theory of money by random guessing⍭ Generate me a similar question◊

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