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Question 1 of 4

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What is the formula for the Quantity Theory of Money?
The amount of money spent must equal the value of transactions. P × Q is equal to nominal GDP — the aggregate price level times the level of output. This must be matched by the money stock times the velocity, or the number of times that each dollar is spent.
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Consider the quantity theory of money. If the money supply is $20,000, the price level is 120, and the real GDP is $1,000, how much is velocity?

If M × V = P × Q, then V = (P × Q) / M. Here, V = (120 × $1,000) / $20,000.
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Consider the quantity theory of money. The money supply is $20,000, the price level is 120, the real GDP is $1,000, and the velocity is 6. Now assume that the money supply increases to $25,000. If prices are fixed, what must the new output level (Q) be? $

If M × V = P × Q, then Q = (M × V) / P. In this case, Q = ($25,000 × 6) / $120. Here, an increase in the money supply increases output, all else equal.
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Consider the quantity theory of money. The money supply is $20,000, the price level is 120, the real GDP is $1,000, and the velocity is 6. If the money supply increases to $25,000, the velocity is the same as calculated above, and output is fixed at $1,000, what must the new price level be? $

If M × V = P × Q, then P = (M × V) / Q. In this case, P = ($25,000 × 6) / $1,000 = $150. Here, an increase in the money supply increases inflation, all else equal.
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