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the quantity theory of money serves at least three purposes in classical model. Explain each of...

the quantity theory of money serves at least three purposes in classical model. Explain each of its role in detail?

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Answer #1

1 .In classical model quantity theory of money determines aggregate demand which determines the price level.

According to quantity theory

MV=PY

M=money quantiy

V=transaction velocity of money i.e. number of time a dollar exchange hands

P=price level

Y=output

2. it helps in determininng money demand

Md=kPY

where k is proportion of nominal income

3 . If velocity of transaction is already known and not simply defined residually to equate MV and PY , the equation of exchange is not merely a definition. With output fixed from the supply side, the equation of exchange now expresses a relationship of proportionality between the exogenously given money supply and the price level: MV = PY

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