Question

Using the quantity theory of money, what would happen if the supply of money increased by 20%? What is the major conclusion of this model?

Answer 1

Quantity theory of money establishes a direct relationship between money supply and inflation.

This theory states that price level or inflation in the economy changes in direct proportion to the changes in money supply.

So,

Using the quantity theory of money, if supply of money increased by 20% then price level or inflation in the economy will also increase by 20%.

Thus,

The major conclusion of this model is that an increase in money supply leads to an increase in price level or inflation in the economy.