Chapter 19.docx - Chapter 19 Quantity Theory Inflation and the Demand for Money Quantity Theory of Money is not a formal theory with specific

Chapter 19.docx - Chapter 19 Quantity Theory Inflation and...

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Chapter 19- Quantity Theory, Inflation, and the Demand for Money Quantity Theory of Money is not a formal theory with specific predictions, it is a framework for thinking about money and inflation with the “equation of exchange” as a starting point Equation of Exchange an identity which illustrates the fact that the total spending per time period is equal to the amount of money in circulation multiplied by the average number of times it is spend per time period (MxV = PxY) Determinants of Velocity Velocity is largely determined by the technology of payments Demand for Money we can think of the equation of exchange as an expression for the demand of money. Increasing use of credit increases V and decreases k Quantity Theory and the Price Level if we take V and Y as fixed at a point in time, larger M should show up as proportionally larger than P Quantity Theory in the Long Run level of prices is proportional to the money
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