Question

According to the assumptions of the quantity theory of money, "if the money supply decreases by 7 percent, then"

a. nominal and real GDP would fall by 7 percent.
b. nominal GDP would fall by 7 percent; real GDP would be unchanged.
c. nominal GDP would be unchanged; real GDP would fall by 7 percent.
d. neither nominal GDP nor real GDP would change.

Answer 1

If the money supply decreases by 7 percent, then nominal GDP would fall by 7 percent; real GDP would be unchanged.

Option B

Explanation:

The quantity theory of money informs in monetary economics that perhaps the real price level of products and services is proportional to the sum of demand or capital in circulation.

Throughout the 16th century, the idea of a principle of the quantity of money (QTM) began. The resulting increase in inflation occurred when gold and silver streams from America to Europe have been pumped into coins.

In the case of a 7 percent drop in the cash surplus, the nominal GDP is set to fall by 7 percent, according to the principle of money volume; real GDP is unaffected.