08 Equation of Exchange

# 08 Equation of Exchange - i. 7% = 4% + 3% ii. 10% = 4% + 6%...

This preview shows pages 1–2. Sign up to view the full content.

I. Equation of Exchange or Quantity Theory of Money a. MV (Total Spending)=PQ (Total Income) = Nominal GDP i. 1.3T x 11.2 = 14.5 T ii. M = Money Supply iii. V = Velocity of Money 1. How many times a year a dollar gets spent on average iv. P = Price Level b. Q = Quantity of Real Output (Real GDP) II. MV = PQ – Have to equal each other a. 10% = 10% b. 25% = 25% III. M + V = P + Q a. 3% + 0 = 0 + 3% i. P = Expected rate of inflation b. M + V = P + Q i. 10% + 0 = 7% + 3 c. Inflation – A rise in the general price level i. There is only one cause on inflation 1. The money supply increases faster than real output a. “Too much money chasing too few goods” d. M + V = P + Q i. 5 + 1 = 4 +2 e. M + V = P + Q i. 1 + 1 = -3 + 5 f. M + V = P + Q i. 4 + 1 = 3 +2 g. M + V = P + Q i. 6 + 2 = 3 + 5 IV. Fisher Equation a. Nominal Interest Rate = Real Rate of Interest + Inflation Rate

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: i. 7% = 4% + 3% ii. 10% = 4% + 6% iii. 6% = 4% + 2% iv. 22% = 19% + 3% b. ∆ M = 8% : 12 % : 5% c. ∆ V = 0% : 0 % : 0% d. ∆ Q = 3% : 3% : 3% e. Real Rate of Interest = 5% f. How Much is the nominal interest rate? i. Nominal Interest Rate = Real Rate of Interest + Inflation Rate 1. 10% = 5% + 5% 2. 14% = 5% + 9% 3. 7% = 5% + 2% ii. ∆ M + ∆ V = ∆ P + ∆ Q 1. 8% + 0% = 5 + 3% 2. 12 + 0 = 9 + 3 3. 5 + 0 = 2 + 3 iii. If the ∆ M is greater than the ∆ Q (with ∆ V=0) 1. Inflation rate will increase ( ∆ P) 2. Nominal interest rates increase 3. ⇑ MS nominal interest rates ⇑ iv. If you decrease ∆ M, then inflation rate decreases then 1. Nominal interest rates decrease 2. ⇓ MS nominal interest rates ⇓ See notes for graphs...
View Full Document

## This note was uploaded on 04/17/2008 for the course ECON Micro taught by Professor Somppi during the Spring '08 term at Auburn University.

### Page1 / 2

08 Equation of Exchange - i. 7% = 4% + 3% ii. 10% = 4% + 6%...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online