While the relationship between money supply

While the - ,moneydemand,thepricelevel,andthe ,itisabitsimplistic.Intherealworld economy, .Ra

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While the relationship between money supply, money demand, the price level, and the  value of money presented above is accurate, it is a bit simplistic. In the real world  economy, these factors are not connected as neatly as the quantity theory of money and  the basic money market diagram present. Rather, a number of variables mediate the  effects of changes in the money supply and money demand on the value of money and  the price level.  The most important variable that mediates the effects of changes in the money supply is  the velocity of money. Imagine that you purchase a hamburger. The waiter then takes  the money that you spent and uses it to pay for his dry cleaning. The dry cleaner then  takes that money and pays to have his car washed. This process continues until the bill  is eventually taken out of circulation. In many cases, bills are not removed from 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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While the - ,moneydemand,thepricelevel,andthe ,itisabitsimplistic.Intherealworld economy, .Ra

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