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ECON 1102 Week 7 post lecture

# What is average value of transactions that a dollar

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What is average value of transactions that a dollar can be used for (in a given period of time)? Velocity Value of Transactions Nominal GDP Money Stock Money Stock = P * Y M 49

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Velocity (V) = Value of transactions Money stock = Nominal GDP Money stock = P * Y M Higher V the higher the speed at which money circulates Example: Velocity of currency In Dec Qtr 2008, currency was \$130bill, nominal GDP was \$1,089bill => V (currency) = nominal GDP/money stock (currency) = \$1,089bill/\$130bill = 8.38 Similarly V (M1) = \$1,089bill/\$722.3bill = 1.51 50
The definition of velocity can be re-arranged to give the quantity equation . M.V = P. Y This states that the money stock times velocity equals nominal GDP. Of course this must be true by definition. There is no economics in the quantity equation . What we care about is the quantity theory . 51

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D ( M.V ) = D ( P.Y ) M = money supply V = velocity of circulation P = price level Y = real GDP If real GDP ( Y ) is constant (in long run) and V is constant, => D M = D P then x% increase in M => x% increase in the price level (P) 52
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Figure 7.1 Countries with higher rates of growth in their money supplies also tended to have higher rates of inflation between 1960 and 1990
Functions of the Reserve Bank of Australia (RBA) Financial system stability Conduct of monetary policy Other monetary management tasks Banker to the Government Banker to banks Custodian of the country’s foreign currency Printer of currency RBA considered to be an ‘independent’ central bank 55

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The stability of the currency of Australia The maintenance of full employment in Australia The economic prosperity and welfare of the people of Australia 56