Consider the Quantity Equation MV = PY

question 156

Essay

Consider the quantity equation MV = PY. Assume that the money market is in equilibrium, where the money supply equals the demand for money, MS = MD = M. Assume also that the velocity of money is constant. In a graph with P on the vertical axis and Y on the horizontal axis, draw the relationship Y(P) implied by the quantity theory. How could this curve be interpreted? How does it change when MS increases?

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Definitions:

Noncash Assets

Assets that are not in the form of cash or cash equivalents, including physical property, intellectual property, and investments.

Remaining Cash

The amount of money that is available after all expenses and liabilities have been paid.

Capital Balances

The amount of money that partners or shareholders have contributed to a company, plus retained earnings or minus losses.

Profit and Loss Sharing

A financial agreement where business profits and losses are shared among partners or investors according to a predetermined ratio.