The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) isequal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation,Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage:Percentage Change in (Mx V) ==You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in eachof the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In thefollowing equation, let "%A" stand for "percentage change in":%AM+%AV ==Percentage Change in (PxQ)%AP+%AQFor example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rateof 5% per year, you can use this rule to determine that the percentage change in the price level is equal to 4% (%AM+%AV-%AY=%AP).Suppose the central bank believes that the velocity of money grows at a predictable rate of 2% per year and that potential real GDP grows at a rate of2% per year. If the central bank follows a monetary policy rule that stipulates money supply growth of 4% per year, it will expect an inflation rate of% per year and nominal GDP growth of% per year.Suppose that actual growth in the velocity of money unexpectedly rises to 2.5%. If the central bank continues to adhere to money supply growth of4% per year and real GDP is unchanged, the inflation rate will be higher or than anticipated, and nominal GDP growth will be higher or thanlowerToweranticipated.

Quantity theory of money: MV = PQ Where M is money supply V is velocity of money P is price level Q…

The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (Mx V): Percentage Change in (Px Q)

The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (Mx V): Percentage Change in (Px Q)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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