Describe the difference between the simple quantity theory of money and the equation of exchange
The equation of exchange is an identity which states that the money supply multiplied by velocity must equal the price level times Real GDP. It is not a theory of the macroeconomy until assumptions are made about the variables in the equation. In the simple quantity theory of money, velocity (V) and Real GDP (Q) are assumed to be constant. With V and Q constant, it follows that changes in the money supply cause strictly proportional changes in the price level.
You might also like to view...
As a possible approach to eliminating the government budget deficit, increasing taxes on the rich only would
A) not lead to a significant increase in tax revenues. B) lead to a significant increase in tax revenues. C) lead to an increase in real GDP. D) lead to a greater number of entitlements.
Using the DD-AA framework, which one of the following statements is the MOST accurate?
A) Only monetary policy can bring the economy to full employment. B) Only fiscal policy can bring the economy to full employment. C) Only both monetary and fiscal policies can bring the economy to full employment. D) Both policies are capable of bringing the economy to full employment and low inflation. E) Monetary policy by itself or fiscal policy by itself can bring the economy to full employment.