What basic assumption about the velocity of money transforms the equation of exchange into the quantity theory of money?

Also: According to the quantity theory, what will happen to nominal income if the money supply increases by 5 percent and velocity does not change?

What will happen to nominal income if, instead, the money supply decreases by 8 percent and velocity does not change?

What will happen to nominal income if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent?

What happens to the price level in the short run in each of these three situations?

Solution Preview

The theory is built on the Fisher equation, MV = PT propounded by the economist Fisher.

M is the stock of money, V is the VELOCITY OF CIRCULATION, P is the average PRICE level and T is the number of transactions in the economy.
The equation states that the quantity of money spent equals the quantity of money used.
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