Question

Explain the following statement: “The classical economists used the quantity theory of money to explicitly explain changes in the aggregate price level, but also used it implicitly to explain aggregate demand”.

Answer 1

As per the classical economists if the money supply in the market increased then people will be demanding more because they will have more money in hand i.e. a higher money supply will increase the demand for the goods and that will shift the price up, Similarly, if there is higher price of the goods or there is a higher demand in the market then reducing the money supply will control the demand and reduce the price,

MV=PT here, MV = money supply and transaction and PT=price of the goods and how much money a person keeps in hand or portion of his income with him, higher the income = higher the money supply = higher the demand.