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 GDP (Y), or MV = PY. The quantity equation must always be true because the definition of the velocity of money is PY/M. If PY/M is substituted for V, the quantity equation yields PY = PY.
The quantity theory of money is a theory derived from the quantity equation by Irving Fisher, who asserted that the velocity of money is fixed. The theory can be judged as true or not true.
You might also like to view...
If firms in a market have been prohibited from reaching the minimum efficient scale,
a. the market is probably perfectly competitive. b. the market is probably a monopoly. c. mergers will result if the restrictions are eliminated. d. the LRATC curve has been shifting upward. e. the LRATC curve has been shifting downward.
When a foreign currency crisis occurs, there is a(n) __________ in the supply of the currency and a(n) __________ in the demand for that currency
a. increase; increase b. decrease; decrease c. increase; decrease d. decrease; increase e. increase; no change