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Unformatted text preview: evel and real GDP to the quantity of money and the velocity of money. It can be written as follows:
Money Supply Velocity = GDP Deflator Real GDP or, more simply, MV = PY The Quantity Equation of Money
Velocity: a measure of how frequently money is turned over in the economy. It is the number of times a dollar is used, on average, to make purchases. The Quantity Equation of Money
A restatement of the quantity equation:
Money Growth + Velocity Growth = Inflation + Real GDP Growth where inflation = the growth rate of a price index (in this case, the GDP deflator). The Quantity Equation of Money
Example: If money supply growth rate = 5 percent per year, velocity growth rate = 0 percent per year, and real GDP growth rate = 3 percent per year, then
Money Growth + Velocity Growth = Inflation + Real GDP Growth 5% + 0% = Inflation + 3% Inflation = 2% per year Hyperinflation
Hyperinflation: a period of very high inflation. Hyperinflation is caused by abnormally high growth rates for the money supply. One episode of hyperinflation oc...
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- Spring '10