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Theory of money and deflation

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Three questions:

Outline the Quantity theory of money and it's theory of inflation.

What effect will deflation have on the economy?

If the deflation is acute and lasts only a short time, how will the effect differ from deflation that lasts a long time and is gradual?

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The story discusses the theory of money and deflation.

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The theory of inflation can be succinctly stated by the Equation of Exchange: MV = PT, where M is money, V is velocity, P the price level and T the level of transactions. Because output is given by the real side and the demand for money is an institutional arrangement, then V and T are more or less fixed. The only variables which remain, then, are M and P. If the equation above holds at all times, then if M rises, we necessarily need P to rise by the same amount. Thus, money supply expansions only cause price inflation. This is the Quantity Theory of ...

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