QUANTITY THEORY OF MONEY CRUDE

“If the MONEY supply (M) increases, then the 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……… 9 x 100 = 3 x 300 ………Price Level also increases proportionately

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

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