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Name Course Instructor Date Quantity Theory of Money Abstract In today’s world, countries are determining the most efficient and effective way to maintain their economic growth by regulating their money supply. An ever-increasing savings rate will at some point lead to a situation in which the real level of savings is lower. In this manner, the supply of loanable funds will increase because it is from savings that loanable funds are obtained. Similarly, the equilibrium real interest rate will decline, thereby triggering investment. The real exchange rate will be lower in relative terms. Therefore, it is imperative to study the factors which are incorporated into the quantity theory of money. This aids policymakers in designing suitable policies in accordance with the prevailing economic situation. This paper achieves that by considering two countries, X, and Y, whose samples are analyzed. Introduction The quantity theory of money posits that there is a relationship, which exists between price levels, as well as supply of money within an economy. Governments used both fiscal and monetary policies to influence the economy, and this paper will focus on the manner in which hypothetical countries, X and Y could apply the quantity theory of money aspects for its operations in real terms. They use their monetary policies to control money supply in order to stimulate inflation, price level, exchange rates and more. In the research, it is expected that the variables employed will have certain effects on the expected variations as in the two nations’
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cases in relation to prices. When exchange rate, as a variable is considered, the following discussion can be presented; Determination of exchange rate Graph showing the determination of exchange rate by forces of demand and supply adapted from (Unc.edu)
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