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The Quantity Theory of Money

The Quantity Theory of Money. Explain the causes of Inflation - Part 1. List the 4 functions of Money. List the 7 qualities of Money. What would happen if money didn’t meet any of these functions or qualities?. Quantity Theory of Money. MV ≡ QP

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The Quantity Theory of Money

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  1. The Quantity Theory of Money Explain the causes of Inflation - Part 1

  2. List the 4 functions of Money

  3. List the 7 qualities of Money

  4. What would happen if money didn’t meet any of these functions or qualities?

  5. Quantity Theory of Money MV ≡ QP ≡ is called an identity. It means that the equation must always balance. M X V must always equal Q x P M = the Money Supply V = the velocity of circulation P = the Price Level Q = the no of goods & services purchased/output

  6. Crude Theory (QTOM) MV ≡ QP Holds V & Q constant & blames inflation on an increase in the money supply as if V & Q are held constant & M then P must  • Discredited as evidence now shows that V & Q are not constant

  7. Sophisticated Theory (QTOM) MV ≡ QP All Variable but V is relatively predictable. An increase in M is not the only factor which causes inflation (P to ). So there must be other factors, specifically changes to Q & V. If more goods and services produced then more money needed to pay for them, more money in circulation – moving around then……price level increases

  8. Money Supply…. • What is the money supply….?

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