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

Increase in money supply always leads to increase in price level. Question is whether this increase will be equiproportionate or not. It depends on level of price elasticity. If this supply will be balanced with demand than increase will be proportionate