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P= (M * V)/ Y
Price level rises if
Money supply rises.
Velocity rises.
Real GDP, Y falls.
This is a long run phenomenon.
The Quantity Theory of Money
The Quantity Theory of Money
International
evidence shows a
marked tendency
for high money
growth rates to be
associated with
high inflation rates.
Figure (a) shows
the evidence for
134 countries from
1990 to 2004.
Market for money: as predicted by
quantity theory of money.
Supply of money (Ms) is exogenously
determined.
-as Ms controlled by the government.
-assume to be unaffected by interest rates
Demand for money (Md= PY, where P is
the general price level and Y is the real)
M*V=P*Y
M P
Cambridge approach to quantity
theory
Economists Alfred Marshall, A.C. Pigou, and
John Maynard Keynes associated with
Cambridge University focused on money
demand instead of money supply.