Econ310_Notes20100909a

# Econ310_Notes20100909a - Q uantity Theory of Money 310-004...

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Quantity Theory of Money (9/9/2010) Econ 310-004 Equations M S V = Py equation of exchange V Py/M S definition of velocity M S = kPy Cambridge equation M D = Py/V money demand for graphical model M S = C money supply for graphical model f8e5 VM S = f8e5 yP quantity theory of money: bar means constant M D /P = f(i,y) liquidity preference theory: f i < 0, f y > 0 M D /P = f(y P , r b – r m , r e – r m , π e – r m ) Friedman’s quantity theory of money: y P > 0, others < 0 M D /P = f(y P ) Friedman’s quantity theory of money approximated V = y/f(i,y) velocity under liquidity preference theory V = y/f(y P ) velocity under Friedman’s quantity theory of money Definitions purchasing power of money – the basket of goods and services that a single dollar can buy price level – weighted average of prices in the economy inflation – a rise in the price level (fall in PPM) deflation – a fall in the price level (rise in PPM) relative prices – implicit barter ratios between goods real variables – “constant” dollars nominal variables – “current” dollars aggregate output – total production of final goods and services in the economy aggregrate income – Total income of factors of production (land, labor, capital) in the economy real money balance – quantity of money in real terms

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Econ310_Notes20100909a - Q uantity Theory of Money 310-004...

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