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Unformatted text preview: Quantecon is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In year 1, Y 1 (RGDP) = $200 million, P 1 (price level) = 100, V (velocity of circulation) = 10. In year 2, the quantity of money was 20% higher than in year 1, i.e. M 2 = M 1 (1+0.2). a. Explain carefully what is the quantity theory of money?  b. What is the equation of exchange? Write down this equation. c. The quantity of money in year 1 (M 1 ) and year 2 (M 2 ). Show you calculation explicitly. d. The price level in year 2 (P 2 ) and inflation rate. . Show your answer graphically.  e. Y 2 ( level of RGDP in year 2) and the velocity of circulation in year 2. ...
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