Question

The simple quantity theory of money predicts that if
a. GDP rises by $400, then the money supply rises by $400.
b. the money supply falls by $300, then GDP rises by $300.
c. the money supply rises by $200, then GDP falls by $200.
d. the money supply rises by 10 percent, then the price level rises by 10 percent.

Answer 1

Answer: Option D

Explanation: Theory stating that the price level of goods and services  directly proportional to the amount of money circulated in the economy is called quantity theory of money.

A. The relation is between GDP and money supply.

B. The statement shows inverse relation between money supply and GDP.

C. Again it shows relation between money supply and GDP.

D. The statement shows positive relation between supply and price level hence it shows quantity theory of money.