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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 Fall '08
 Miyanishi
 Economics, Inflation, Quantity Equation, percentage change rate

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