Answer to Question #66505 in Macroeconomics for Kriftian

Question

Consider the following statement in the short-run and the long-run: “The quantity theory of money (quantity equation) states than an increase in the money supply will lead to an equiproportionate increase in the price level”. Is this true or false? Explain.

Answer 1

This statement is false, according to the quantity theory of money, MV=PY. And when the money supply (M) increase, then the price level also increase. It is possible, but only in the long-run. In the short-run this formula isn`t actual. That`s why this statement is false.