The quantity theory of money states that a reduction in the quantity of money in circulation would bring about?

A. A constant change in price
B. A rise in prices
C. An unequal fall in prices
D. A proportionate fall in price

Correct Answer:

Option A – A constant change in price

Explanation

The quantity theory of money assumes that the velocity of money is constant. This also means that the inflation rate is equal to the growth rate of the money supply minus the growth rate of output. If the money supply grows at the same rate as output, the price level will be stable.