Chapter 6R, Problem 9MCQ

To determine

To find:

Impact of an increase in the money supply.

Explanation of Solution

Because the amount of money in circulation in an economy directly affects the overall price level, there is a link between money supply and price level. This is mostly due to the fact that when money is plentiful, demand for products and services rises, and when money is scarce, demand declines. The quantity theory of money, which contends that the amount of money available in an economy directly affects the price level, provides an economic explanation for this impact.

The notion that customers will only spend when they have money to spend is a straightforward approach to analyze the connection between the money supply and price level. In other words, people will have more money to spend when the economy is prosperous. The level of price likewise rises in response to this rise in demand.

Thus, from the above we can conclude that the correct option is E.