If the quantity of goods produced in a country remains constant while the money supply rises, a backing theorist would expect________in prices while a quantity theorist would expect______in prices.
a. a rise, a rise
b. a rise, no change
c. a rise, a fall
d. no change, a rise
e. a fall, no change
Answer is D.
Backing theory says that issuing of money is not inflammatory because money issued is backed by the assets. In this assets of issuing institution increases in same proportion.
Quantity theory says that inflation is the direct function of money supply when output of goods and services is constant.
Quantity theory-
MV= PQ. Where - M = money supply, V= velocity of money
P= Price level, Q= output.
So when V and Q are constant then increase or decrease in money supply (M) will have proportionate effect on price level (P).
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