Use Quantity Theory of Money:

1. State the equation of exchange; explain what each variable represents and the meaning of the identity expressed in this equation. 2. To derive the quantity theory of money from the equation of exchange, we need to make two assumptions. State these assumptions and explain the meaning behind them. 3. These assumptions lead to a very stark prediction between the price level and the quantity of money; state the prediction and use the equation of exchange, together with the assumptions from part 2, to support it