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QUANTITY THEORY OF MONEY

QUANTITY THEORY OF MONEY. CRUDE. Definition. “If the MONEY supply (M) increases , then the PRICE LEVEL (P) will also increase ”. CRUDE QTM Assumptions: V & Q are constant. M x V = P x Q. 6 x 100 = 2 x 300. If Money stock increases then……….

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QUANTITY THEORY OF MONEY

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  1. QUANTITY THEORY OF MONEY CRUDE

  2. Definition “If the MONEY supply (M) increases, then the PRICE LEVEL (P) will also increase”

  3. CRUDE QTMAssumptions: V & Q are constant M x V = P x Q 6 x 100 = 2 x 300 If Money stock increases then……… 9 x 100 = 3 x 300 ………Price Level also increases

  4. Sophisticated QTMAssumptions: V is constant M x V = P x Q 5 x 10 = 2 x 25 If Money stock increases then……… 10 x 10 = 2 x 50 …Price Level (P) will NOT increase if there is a proportional increase in Quantity (Q) Or………

  5. 5 x 10 = 2 x 25 If Money stock increases then……… 10 x 10 = 2.5 x 40 …Price Level (P) will increase if there is a less than proportional increase in Quantity (Q)

  6. Increase in Money Supply Happens when…… • Government • Spends on projects • Prints more money • Consumers • Increase spending through Borrowing • Businesses • Increase spending through Borrowing

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