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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

In an equation-of-exchange framework, the price level is dependent upon the money supply, velocity, and Real GDR. Do you agree or disagree? Explain your answer.

To determine

Relation of price with money supply, velocity, and real GDP in the equation of exchange.

Explanation

According to the monetarist, money is used as the medium of exchange. The theory explains the relationship of money with price level and also with nominal GDP.

The equation of exchange is as follows:

MV = PQP=MVQ

Here, price is directly proportional to money supply and to the velocity. That is, when the money supply increases, the price for the good also increases.

For example: The money supply is 100, velocity is 4, and the quantity supplied is 20. Thus, the price of the product is calculated as follows:

Price=MVQ=

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