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101_F07_HO_4 - ECN 101 Shaofeng Xu Fall 07 Handout 4...

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ECN 101 Fall 07 Shaofeng Xu Handout 4: Quantity Equation and Fisher E/ect Oct 17, 2007 1. Quantity Equation In the economics, the relationship between money circulation and transac- tions is expressed by the following Quantity Equation: M ° V = P ° Y where M: money stock or money supply; V: velocity of money circulation; P: price level(eg. CPI); Y: real GDP. It is very bene°cial to read the example on p.84. Several points to mark: a. we always assume a constant velocity( V ) which depends mainly on the institution of an economy; b. keep in mind, Y is the real GDP; c. IMPORTANT, the quantity equation has a famous derivative equation: g M + g V = g P + g Y where g M : growth rate(percentage change rate) of money supply; g V : growth rate(percentage change rate) of velocity; g P : growth rate(percentage change rate) of price level( g P is just the In±ation Rate ° ); g Y : growth rate(percentage change rate) of real GDP; Examples: suppose the money supply last year is 100. The Fed, however, has increased the supply to 150 this year. What is the growth rate of money supply between
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