Principles of Economics- Mankiw (5th) 616

Principles of Economics- Mankiw (5th) 616 - 636 PA R T T E...

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636 PART TEN MONEY AND PRICES IN THE LONG RUN The price level must rise, the quantity of output must rise, or the velocity of money must fall. In many cases, it turns out that the velocity of money is relatively stable. For example, Figure 28-3 shows nominal GDP, the quantity of money (as measured by M2), and the velocity of money for the U.S. economy since 1960. Although the ve- locity of money is not exactly constant, it has not changed dramatically. By con- trast, the money supply and nominal GDP during this period have increased more than tenfold. Thus, for some purposes, the assumption of constant velocity may be a good approximation. We now have all the elements necessary to explain the equilibrium price level and inflation rate. Here they are: 1. The velocity of money is relatively stable over time. 2. Because velocity is stable, when the Fed changes the quantity of money ( M ), it causes proportionate changes in the nominal value of output ( P ± Y ).
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