91Ó°ÊÓ

The quantity theory of money expresses that there is an immediate connection between the money supply and the cost level. In the event that how much money supply in the economy builds, there is an expansion in the cost at a similar level consequently causing expansion.

We know,

MV = PY

M = $\$1$trillion $+\$100$billion = $\$1.1$trillion

$\mathrm{Y}=\mathrm{\$}5\text{trillion,and}\mathrm{V}=\mathrm{\$}10\text{trillion}$

$$\begin{gathered} P=1.1×\frac{10}{5} \\ P=2.2 \end{gathered}$$

the new equilibrium price level after full adjustment to the increase in the money supply is$\$2.2$trillion.

Percentage increase in money supply = (money supply new value -money supply initial value)/initial value $×100$

$$\begin{gathered} ⇒\frac{{\displaystyle 1.1−1)}}{1}×100 \\ =10\% \end{gathered}$$

the percentage change in the price level

$$\begin{gathered} ⇒\frac{{\displaystyle (2.2−2)}}{2}×100 \\ =10\% \end{gathered}$$

The rate change in cash supply is equivalent to the rate change in cost level. Henceforth an immediate connection between cash supply and the cost of labour and products is laid out, subsequently causing expansion. Accordingly, the amount hypothesis of cash is demonstrated.