Classical economists believed that changes in the money supply affect the price level. Their position was based on the equation of exchange and the simple quantity theory of money.
1. State the equation of exchange.
2. Define velocity.
3. Provide three interpretations for the equation of exchange.
4. Explain how to turn the equation of exchange into the simple quantity theory of money.
5. Use the simple quantity theory of money to predict the effect of a change in the money supply.