Needing a little help on the seccond part of this question as ive drawn a blank.
I understand the theory for the demand, but when it comes to this example im a bit stuck.
The first part was fine, any ideas for the seccond would be appriciated...
"Explain in approximately 300 words the elementary theory of the demand for money. In a further 100 words, assess this statement. “A rise in the price level of 5% will raise the real quantity of money demanded by 5%, ceteris paribus.”
Demand for money Watch
- Thread Starter
- 01-12-2010 18:11
- 04-12-2010 02:10
Hey, so the second part seems independent of applying the elementary theory of money.
Use Fishers Equation of Exchange: MV=PY and give ceteris paribus assumption, the number of transactions taking place will stay the same, so will the income velocity V. M, the quantity of money must hence rise with P, the price level, for this to hold. It asks to assess, so you could query the question itself. For example, how could the price level rise first without a prior increase in the domestic money supply?
Hope this helps