Money - Money & Inflation A quick review and...

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Money & Inflation A quick review and continuation from last week’s class EC121 – Intermediate Macroeconomics Brown University Monday, October 24 th , 2005
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The Quantity Theory of Money ± The quantity equation is expressed as: M µ V ª P µ T ± M is quantity of money in the economy ± V denotes the transactions velocity of money ± The number of times a unit of currency changes hands in a given period of time ± P is the price of a typical transaction ± T is the total number of transactions in given period of time
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The Quantity Theory (Cont.) ± Example: A bread economy ± Transactions: T = 60 loaves of bread / yr ± Price: P = $0.50 / loaf ± Therefore dollar value of transactions is: PT = $30 / yr ± Suppose M = $10 ± Then, V must be given by PT / M = 3 times / yr ± Observe that the quantity equation is really an identity – it always holds true (tautology)
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The Quantity Theory (Cont.) ± The number of transactions ( T ) is difficult to measure but is directly related to aggregate output ( Y ) in an economy. ± In theory, the dollar value of transactions is equal to that of Y (or nominal GDP) so that: P µ T = P µ Y ± The revised quantity equation is therefore: M µ V = P µ Y which is an equation NOT an identity.
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The Quantity Theory (Cont.)
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Money - Money & Inflation A quick review and...

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