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WAEC Economics 2001 Question 33

Question 33

Money and Inflation

The Quantity Theory of money states that a reduction in the quantity of money in circulation would bring about

  1. A.a geometrical fall in prices
  2. B.a proportionate fall in prices.
  3. C.a rise in prices.
  4. D.an unequal fall in prices.
Show the answer and explanation

Answer: B (a proportionate fall in prices.)

Explanation

MV = PT: with V and T constant, the price level changes in the same proportion as the money supply.