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1)Explain the quantity theory of money demand and discuss its main hypotheses. 2) Derive carefully the...

1)Explain the quantity theory of money demand and discuss its main hypotheses.

2) Derive carefully the IS curve and discuss the determinants of its slope and its position.

3) Derive carefully the LM curve and discuss the determinants of its slope and its position.

4)Discuss the effects of an expansionary fiscal policy in the IS‐LM model.

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Answer #1

Due to presence of HOMEWORKLIB POLICY, I am answering first question.

1.

Ans:

Quantity theory of money states that money supply and prices move in same direction. As money supply rises, the whole impact translates into rise in prices as real GDP and velocity of money tends to stay constant in long run,

We have:

MV = PQ

where,

M = Money supply

V = Velocity of money

P = Price level

Q = Real GDP or Output.

In other words, Due to rise in money supply, people tend to have more money in hands due to which inflationary pressures come into picture as few goods are chased by more money (since output tends to stay unchanged in long run).

If you are satisfied with the answer, please provide a positive rating. Feel free to comment in case of queries.

Have a nice day ahead!

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