How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true?
What will be an ideal response?
The quantity equation is that the money supply (M) times the velocity of money (V) equals the price level (P) times real output (Y), i.e., M × V = P × Y. The quantity equation must always be true, because of the definition of the velocity of money: V = . Substitute in for V, and the quantity equation yields P × Y = P × Y. The quantity theory of money is a theory derived from the quantity equation by asserting that the velocity of money is fixed, and can be true or not true.
You might also like to view...
An attempt by a central bank to alter the money supply by buying or selling domestic assets
A) will leave both domestic money supply and foreign reserves unchanged. B) will cause an offsetting change in aggregate demand. C) will lead to a rise in domestic employment and output. D) will lead to a decrease in domestic employment and output. E) will cause an offsetting change in foreign reserves and leave the domestic money supply unchanged.
In the Keynesian model of an open economy, a temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment) in the economy.
A. lower; increase B. lower; decrease C. raise; increase D. raise; decrease
In the U.S., the Revolutionary War (1775-1781) was immediately followed by an increase in:
a. trade. b. inflation. c. real per capita income. d. slave imports.
Many banks offer accounts featuring "Automatic Transfer from Savings" allowing customers to overdraw checking accounts and the bank will transfer enough funds to cover the check automatically. Most likely, what is the effect of this feature on velocity?
a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to saving accounts.