CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?
A. Prices
B. Velocity
C. Employment
Explanation: The quantity theory of money implies that the existing money stock (M) multiplied by velocity (V) equals the nominal GDP (output times the price level). In order to maintain the equality, if M increases, the price level (P) must also increase.

User Contributed Comments 2

User Comment
wglipscomb Why is A better than B? Couldn't increased money supply and decreased velocity maintain the equality?
wglipscomb Found an answer in my notes

money neutrality - the belief that real variables (real GDP and velocity) are not affected by monetary variables (money supply and prices).
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