Define the quantity theory of money and show how it is related to the equation of exchange

What will be an ideal response?


The quantity theory of money is the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level (other things remaining the same). The equation of exchange states that the quantity of money multiplied by velocity of circulation equals the price level times real GDP, or M × V = P × Y. Divide both sides of this formula by V to obtain P = (M × V) ÷ Y. This formula shows that when M increases, as long as V and Y do not change, P increases by the same percentage, which is the conclusion of the quantity theory of money.

Economics

You might also like to view...

If the price of hair styling increases, then

A) hair styling salons hire fewer workers but makes more profit. B) hair stylists demand an increase in wages and the salons hire fewer workers. C) the value of marginal product of each hair stylist increases and the demand curve for hair stylists shifts leftward. D) the value of marginal product of each hair stylist increases and the demand curve for hair stylists shifts rightward.

Economics

The country of Erbia has been experiencing high unemployment over a period of seven years. A likely outcome of such a situation is that potential GDP will fall

a. True b. False Indicate whether the statement is true or false

Economics

Labor resources:

a. include only physical activities. b. are only counted as a resource if used in the production of other resources. c. include only skilled labor. d. include both physical and mental activities. e. include human effort involved in the production of goods, but not services.

Economics

Firms can make decisions using marginal analysis even if they do not know the shape of a demand curve

a. True b. False Indicate whether the statement is true or false

Economics