Econ 2H03 - Quantity of Money Theroy Chapter 4 - 6

Econ 2H03 - Quantity of Money Theroy Chapter 4 - 6 - The...

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The quantity theory of money Quantity equation: M V = P Y Assume V is constant & exogenous: V V Then, quantity equation becomes: M V P Y If velocity is fixed, the quantity of money determines the dollar value of the economy’s output. The quantity theory of money, cont. M V P Y How the price level is determined: With V constant, the money supply ( M ) determines nominal GDP (
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Unformatted text preview: P Y ). • Real GDP is determined by the economy’s supplies of K and L and the production function (Ch. 3). • Therefore, if Y is also fixed, then the price level is proportional to the money supply. 4-18 The quantity theory of money, cont. • Recall from Chapter 2: The growth rate of a product equals the sum of the growth rates....
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