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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