Question

The money supply falls from $1,200 billion to $1,160 billion. According to the simple quantity theory of money, the price level will decline by __________ percent.

Answer 1

3.33%

Step-by-step explanation:

In the simple quantity theory of money, if the supply falls, then the price level will also be decreased. And, if the supply rise, then the price level will also be increased. It means that it shows a direct relationship between the money supply and the price level.

So, the price level would decline by

= ($1,200 billion - $1,160 billion) ÷ ($1,200 billion) × 100

= ($40 billion) ÷ ($1,200 billion) × 100

= 3.33%