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