Quantity Theory of Money

Definition of Deflation -

A sustained decrease in the general price level over a period of time (opposite of inflation)

Definition of Inflation -

A sustained increase in the general price level over a period of time

Definition of Disinflation -

Where the rate of inflation is decreasing (prices have still risen but by a smaller amount that the previous period)

Definition of quantity of goods and services?

It is the GDP value of all goods and services produced in New Zealand in a year.

Definition of Price Level?

It is the average level of all prices

What is the Quantity Theory of Money? `

It is the relationship between money supply and the price level. It's also an equation showing the relationship between M, V, P and Q.

What is "MV=PQ" called?

It's called the equation of exchange.

Definition of Velocity of circulation (VOC) ?

It's the number of time money changes hands.

Definition of Money Supply?

It's the total quantity of money.

What is the Quantity Theory of Money equation?

MV=PQ

Describe the Crude theory -

Since V and Q are constant, therefore if M increases then P increases. i.e: increases in the money supply will cause inflation.

What are the components of the QTOM equation that are considered to stay constant?

V - Velocity of circulation and Q - Quantity of Real GDP

Describe the sophisticated theory -

V and Q are not constant. i.e: Q and/or V can change. Therefore if M doubled then P would not also double if Q or V changed as well.