Quantity Theory Of Money

Question 1

Crude theory (M & P can change)

Answer 1

When two variables (one of them p) change and other variables are held constant. Change in p will be proportionate (to m).
If m doubles p doubles assuming v ad q remain constant)

Question 2

Sophisticated Theory (Q and V can change)

Answer 2

Any of the variables can change. (Q and V)
Lead to increase in real output (Q)
Weakness to crude theory
Additional variables may be given to you or linked to the business cycle.
Must explain the proportional effect on price level (p) using the equation.

Question 3

Sophisticated theory equation

Answer 3

(%_M) +(%_V) = (%P) + (%+Q

Subtract

Question 4

Equation

Answer 4

MV=PQ

Question 5

M

Answer 5

Money supply (value of funds in circulation)

Question 6

V

Answer 6

Velocity of circulation (the number of times money circulates in the economy)

Question 7

P

Answer 7

General Price level (the average of all goods in an economy)

Question 8

Q

Answer 8

Real output (volume of production in economy, goods & services

Question 9

Answer format (Crude theory)

Answer 9

State the quantity theory of money and equation.
Relate to question/ explain
Crude theory
Use numbers

Question 10

What caused V to change

Answer 10

Consumer confidence
Business confidence
Interest rates
Investment/ borrowing

Linked to the business cycle, ie where the economy is placed in the business cycle would affect V.