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In the long run, sustained increases in the money supply lead to inflation. The quantity theory of money (MV = PY) shows that if money supply grows faster than real output, prices must rise. Money is neutral in the long run: it affects nominal variables but not real variables.
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Practice Questions: Test Your Understanding
Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.
Question 1 of 3
According to the quantity theory of money, if the money supply (M) is $2,000 billion, the velocity of money (V) is 4, and real GDP (Y) is $4,000 billion, what is the aggregate price level (P)?
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Key Takeaways
- 📊Master the fundamentals: Understanding these core concepts is essential for success in AP Economics.
- ✅Practice makes perfect: Use the interactive exercises and practice questions to reinforce your understanding.