Final answer:
The quantity theory of money asserts that if the velocity of money is constant, changes in the money supply are directly related to changes in nominal GDP, which can affect inflation, real GDP or both.
Step-by-step explanation:
The quantity theory of money is a theory that relates the quantity of money to nominal Gross Domestic Product (GDP). According to this theory, if the velocity of money is constant over time, changes in the quantity of money would lead to directly proportional changes in nominal GDP. This implies that a percentage increase in the money supply results in the same percentage rise in nominal GDP, which could reflect as either an increase in the price level (inflation), an increase in real GDP, or a combination of both.
The equation often associated with the quantity theory of money is M x V = P x T, which stands for Money Supply x Velocity = Price Level x Transactions or Output. In practical terms, the equation can be expressed as M x V = Nominal GDP, and this indicates that a consistent, predictable change in the money supply will yield a predictable effect on nominal GDP. However, if the velocity of money changes unpredictably, then the effect on nominal GDP also becomes unpredictable.
Based on the concept of the quantity theory of money, the correct answer to the student's question is e) the quantity of money are directly related to changes in nominal GDP.