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Unformatted text preview: The equation of exchange says that MV = PY. The quantity theory of money says that V is a constant. Therefore, the demand for real money balances is proportional to aggregate output. As income rises, more transactions are carried out, so the demand for money rises. velvety depends on: frequency of paychecks use of credit transportation speed communications speed habits population density Is the velocity of money really stable? Interest Responsiveness of Transactions Demand The quantity theory assumes that interest rates do not affect the transactions demand for money. However, the funds that people hold for transactions can be held in either cash or savings deposits. There is a tradeoff between the convenience of cash and the interest you earn on your savings account. The higher the interest rate, the less cash you will hold and the more transactions balances you place in your savings account....
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