What are the assumptions of the simple quantity theory of money?Explain

What are the assumptions of the simple quantity theory of money? Check all that apply.

Velocity and output are inversely related.
The price level is constant.
Velocity is constant.
Output is constant.

The simple quantity theory of money predicts that there is_______________(an inverse relationship/ a strictly proportional link) between changes in ____________ (prices/velocity/output)

2. Why is the AS curve vertical in the simple quantity theory of money?
Strictly proportional changes in the money supply will bring about strictly proportional changes in the price level. This relationship results in a vertical AS curve at the stated level of Real GDP.
One of the assumptions of the simple quantity theory of money is that output is fixed in the short run, which means that the AS curve is vertical at the stated level of Real GDP.
One of the assumptions of the simple quantity theory of money is that output is fixed in the long run, which means the AS curve is vertical at all levels of Real GDP.
Changes in velocity are so small that for all practical purposes velocity can be assumed to be constant over long periods of time, thus resulting in a vertical AS curve.
3. Complete the following table by determining what will lead to an increase in aggregate demand according to the simple quantity theory of money versus monetarism.
Increase in Money Supply Decrease in Money Supply Increase in Velocity Decrease in Velocity
Quantity theory of money
Monetarism

4. According to the simple quantity theory of money, when the money supply rises, real GDP will________(decrease/increase or remain the same) and the price level will______(increase, decrease, remain the same ) because the percentage change in the price level will be_______(less than/ the same as/ greater than) the percentage change in the money supply.
5. In monetarism, indicate how each of the following will affect the price level in the short run.
Effect on Price Level
Increase Decrease No Change
An increase in velocity
A decrease in the money supply
An increase in the money supply
A decrease in velocity
7. What is the difference in the long run between a one-shot increase in aggregate demand and a one-shot decrease in short-run aggregate supply?
If aggregate demand increases, the price level will be higher in the long run than it was originally. If aggregate supply decreases, the price level eventually returns to its original level in the long run.
If aggregate demand increases, the price level eventually returns to its original level in the long run. If aggregate supply decreases, the price level will be higher in the long run than it was originally.
If aggregate demand increases and aggregate supply decreases, the impact in the long run is the same; prices levels are higher either way.
If aggregate demand increases and aggregate supply decreases, the impact in the long run is the same. Price levels are lower either way.

8. True or False: One-shot inflation may be a demand-side (of the economy) or a supply-side phenomenon, but continued inflation is likely to be a demand-side phenomenon.
True
False
9. Why might demand-induced, one-shot inflation seem like supply-induced one-shot inflation?
Awareness: If for example, you have no knowledge of economics, you might not realize a change in the money supply has anything to do with a change in prices or wage rates. You understand prices have increased and assume it is supply driven; you have no knowledge of the cause of this phenomenon.
Perception and lack of understanding: If, for example, the Fed increases the money supply, an increase in AD and one-shot inflation to higher price levels would occur. As prices begin to rise, so would wage rates, etc. Many would perceive the higher price level a result of higher prices and wages, not the increased money supply that started the process.
If aggregate demand increases, the price level will be higher in the long run than it was originally. If aggregate supply decreases, the price level eventually returns to its original level in the long run.
There is no confusion between demand-induced one-shot inflation and supply-induced one-shot inflation.

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