Deriving the aggregate demand curve from the quantity equation The quantity theo

Question

Deriving the aggregate demand curve from the quantity equation The quantity theory states that MV = PY, which means that holding constant, the money supply determines the nominal value of output. This equation can also be written in terms of the supply and demand for real money balances: M/P = (M/P)^d = kY, where k = 1/V. In this form, represents the supply of real money balances. Imagine an economy in which the nominal money supply is $1,500 billion and velocity of money is 3.33. Use the quantity equation to calculate the output based on the given price levels, then enter these values in the appropriate cells. Be sure to round your answers to the nearest billion dollars!

Explanation / Answer

a. Velocity.

By holding velocity constant, any change in money supply M, would bring about exact proportionate change in the nominal value of output, P*Y.

b. M/P.

The supply od real balances is represented by money supply/prices.

c. Given M = 1500 billion

V = 3.33

M*V = P*Y

So, Y = (M*V)/P.

Price Output 78 64.038 100 49.95 119 41.974 139 35.935

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.