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According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then nominal GDP would fall by 7 percent; real GDP would be unchanged.
What is theory of money?
The quantity theory of money (commonly abbreviated as QTM) is one of the schools of Western economic thought that originated in the 16th and 17th century and is used in monetary economics. According to the QTM, the general level of prices for goods and services is inversely correlated with the money supply. For instance, QTM predicts that price levels will double if the amount of money in an economy twice. The hypothesis was first put forth by Renaissance mathematician Nicolaus Copernicus in 1517, and it was then reiterated by John Locke, David Hume, and Jean Bodin with considerable influence. When economists Milton Friedman and Anna Schwartz published their book A Monetary History of the United States in 1963, the theory saw a significant increase in popularity.
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