GDP Describe the quantity theory of money, defining each variable.

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An increase in money supply would have no effect on nominal GDP when money velocity (V in the equation) declines. Keynesians argue that this can happen, while classical economists operate on the assumption that money velocity can be taken as a constant.

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In its simplified form, the quantity theory of money says that there is a direct and proportional relationship between the quantity of money in the economy and the price level.  The equation is

M*V = P*Q

where M is the total amount of money in circulation, V is the velocity of the money -- how often it passes from one person to another, P is the price level and Q is the value of final expenditures.

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