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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

What are the assumptions and predictions of the simple quantity theory of money? Does the simple quantity theory of money predict well?

To determine

The assumptions and predictions of simple quantity theory of money.

Explanation

The quantity theory of money assumes that the velocity and output remains constant. When this assumption holds good, there exists a proportional link between the changes in money supply and the changes in prices. However, it is evident that in the real world, a strictly proportional relationship between the money supply and the price level do not exist. However, there is a strong direct relationship between the changes in money supply and prices. Thus, the quantity theory is capable of predict to an extent.

Concept

Quantity theory of money:  The Quantity theory of money refers to the relationship between the price level and money supply. The quantity theory of money equation is MV = PY.

Money supply: Money supply refers to the total amount of monetary assets circulating in an economy during a particular period of time.

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