JAMB Economics 2015 Paper

Concept:The quantity theory of money links changes in the money supply directly to changes in the price level when output and velocity are constant.Explanation:The Fisher equation is $MV = PT$.Here, $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $T$ is the volume of transactions (real output).Assuming $V$ and $T$ are constant, any change in $M$ leads to a proportional change in $P$.If the money in circulation is reduced, the price level falls by the same proportion.So a reduction in money supply causes a proportionate fall in price, not a rise or an unequal change.Answer:D. A proportionate fall in price