1. QUANTITY THEORY OF MONEY
CRUDE

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

3. 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

4. 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. 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)

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