The Effect of Doubling Quantity of Money Research Paper - 1

The Effect of Doubling Quantity of Money - Research Paper Example We will discuss the effect of doubling the quantity of money, an increase in willingness to work and a fall in the propensity to save, and their effect on the interest rates, price levels or inflation and the level of national output. The nominal quantity of money can be defined as the money measured with a particular currency and the quantity is directly proportional to the level of prices, in this case therefore the nominal quantity of money is equal to the price level multiplied by real money, where real money is the quantity of money and is usually a constant. The doubling of nominal quantity of money can be analysed using the quantity theory of money which states: MV = PQ where M is money supply, V is the velocity of money, P is prices and Q is the output level. PQ, therefore, is the nominal value and as the equation depict if this doubles then the other side which is MV must also double. Therefore we expect that the money supply will have increased and as a result then the inflation level will rise, inflation is the increase in the price level in the entire economy. When the nominal quantity of money doubles then the level of prices to rise in the economy, as the level of prices increases then we expect also that the output level will increase as more investors and producers produce more goods and services due to the high prices in the economy. When the level of the nominal quantity of money increases then we expect the level of interest rates to increase, the increase in interest rates will be a policy measure to ensure that the money supply in the economy is reduced in order to deal with the high inflation level in the economy. For this reason, therefore, the interest rates will rise in order to reduce the money supply.