Question

(a) Explain the quantity theory and (b) how does the theory explains the cause of inflation​

Answer 1

Answer:

Kindly check explanation

Explanation:

The quantity theory generally represented by the formula:

MV = PT

Where ;

M, money supply, that is monet in the economy

V, velocity of money, which shows the rate at which money is used to obtain a finished product.

P ; average price level

T ; volume of transactions, good and services transacted in. the economy

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The quantity theory explains how variation in the quantity of money in circulation within an economy causes variation in the price level of goods and services.

B.)

From the money quantity theory, we can observe a proportional relationship between quantity of money supply and the price level of goods. With more money in circulation, people are able to increase their demand for goods and services. Increase demand drives prices Hence, causing inflation.