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How the Demand Curve is Consistent with the Quantity Theory of Money

The AD curve is consistent with the quantity theory of money.


The expansino shifts the AD schedule from AD to AD1. I nthe very short run, if the price level were to remain at the Po, the economy would move to point E1. This would cause excess demand in the goods and labour markets, which would in turn force up wages and prices.
The classical model assumes instance adjustment, the economy would go directly to point E2, with no charges in output, and a higher price level. In the long run, quantity theory of money holds.

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