The simple quantity theory of money assumes that velocity and output are constant. If these two assumptions are correct, then changes in the money supply and changes in prices have a strictly proportional relationship.
Explain the quantity theory of money.
According to the quantity theory of money, the general price level of goods and services is directly proportional to the amount of money in the economy, also identified as the money supply.
The simple quantity theory of money is the theory that assumes velocity (V) and real GDP (Q) are constant and predicts that changes in the money supply (M) lead to strictly proportional changes in the price level.
Therefore, in the simple quantity theory of money, credit money is always available. Money's velocity should not change.
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