Asked Dec 1, 2019
According to the quantity theory of money, the price level is:
Selected Answer:
indeterminate in the long run.
indeterminate in the long run.
determined by the money supply only.
determined by the ratio of the effective quantity of money to the volume of goods.
determined by the volume of goods produced.

Expert Answer

Step 1

According to the quantity theory of money, there is direct relationship between the quantity of money and the price level of goods and services in the economy. If the amount of money doubles, price level also doubles in the economy, causing inflation.

Step 2

The quantity theory of money is also known as Fisher Equation, is expressed as:


Here, M is the money supply,

V = velocity of circulation of the money in the economy

P = price level of goods and services

T = volume of transaction of goods and services.

Since, MV = PT

                P = ...

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