Unformatted text preview: to total expenditures. Total expenditures is equal to C+I+G+(EX-IM) Since MV=TE, MV=C+I+G+(EX-IM) A change in the money supply or a change in velocity will change aggregate demand and therefore lead to a shift in the AD curve. • In the simple quantity theory of money, velocity is assumed to be constant, thus only M can affect AD. Diagrammatically…. Dropping the Assumptions that V and Q are Constant
changed to be that V is predictable not constant, it moves in predictable moves, Q can move, what is behind inflationary or recession-ary gaps • Remember: M x V P x Q, then P=MxV Q • Money supply, velocity, and Real GDP determine the Price Level. • An increase in M or V or a decrease in Q will cause prices to rise. This is inflation. • A decrease in M or V or an increase in Q will cause prices to fall. This is deflation.
no longer a proportional relationship between from m to p Modern Monetarism
Assumptions: V is not constant, but predictable GDP not always at full employment Thus, MV = PQ A non- proportional change from M to P in the monetarism school of thought, it is thought that the supply of market effects the AD, they focus on the money market with classical, can only change by changes in money supply, modern is money supply or v Monetarism: Key Views
• Velocity changes in a predictable way. • Aggregate Demand depends on the money supply and on Velocity. • The SRAS curve is upward sloping.
LRAS is vertical, AD is downward sloping • The Economy is Self-Regulating (Prices and Wages are flexible) use SRAS to restore long run EQ rather than the AD Diagrammatically….. The Monetarist View of the Economy
• The economy is self-regulating. • Changes in velocity and the money supply can change aggregate demand. • Changes in velocity and the money supply will change the price level and Real GDP in the short run, but only the price level in the long run. The Monetarist View of the Economy
• Changes in velocit...
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