Macro Foundations · intermediate
What moves on the Quantity Theory of Money diagram
Higher realrealAdjusted for inflation, measured in actual purchasing power. output flattens P = (V/Y)·M: the economy absorbs money growth up to its own growth rate.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
RealrealAdjusted for inflation, measured in actual purchasing power. output expands, the same money now chases more goods, flattening the line.
Prices FALL at the same money stock. This is why money can grow alongside output without inflationinflationA sustained rise in the overall price level, eroding money's purchasing power..
Examiners ask this as: output growth absorbs money, growth without inflation.
Other scenarios on Quantity Theory of Money