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?© BrainMass Inc. brainmass.com November 24, 2022, 11:43 am ad1c9bdddf
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 ...
The story discusses the theory of money and deflation.