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Unformatted text preview: Chapter 22-The Demand for Money Velocity of Money and The Equation of Exchange Quantity Theory Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply affect only the price level Movement in the price level results solely from change in the quantity of money Quantity Theory of Money Demand Quantity Theory of Money Demand Demand for money is determined by: The level of transactions generated by the level of nominal income PY M = the money supply P = price level Y = aggregate output (income) P Y = aggregate nominal income (nominal GDP) V = velocity of money (average number of times per year that a dollar is spent) V = P Y M Equation of Exchange M V = P Y The institutions in the economy that affect the way people conduct transactions and thus determine velocity and hence k Keyness Liquidity Preference Theory Why do individuals hold money?...
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- Spring '10