Question

Please write out and explain what causes exchange-rate change in the
simple (or quantity theory of money) version of the fundamental equation of the
monetary approach to exchange-rate determination.

Answer 1

Ans.

Quantity theory of money says that total spending (in money terms) is proportional to the quantity of money.
The theory can be explained in terms of Equation, known as the quantity equation of exchange:
M × V = P × Y
M = the quantity of money,
V = the velocity (the average number of times currency changes hands),
P =the average price level, and
Y=real output.
It means that over a given period, the amount of money used to purchase all goods and services in an economy, M × V, is equal to monetary value of this output, P × Y.
An assumption of quantity theory is that velocity of money is approximately constant therefore the spending P × Y is approximately proportional to M.