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