Chapter 9: Monetary Theory and Policy

Demand for Money

the relationship between the interest rate and how much money people choose to hold

Equation of Exchange

the quantity of money, **M**, multiplied by its velocity **V**, equals nominal GDP, which is the product of the price level **P**, and real GDP, **Y** or M x V = P x Y

Velocity of Money

the average number of times per year each dollar is used to purchase final goods and services(8.5 years)

Quantity Theory of Money

if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP

Variables

M=quantity of money in economy

V=velocity of money

P=average price level

Y=real GDP

MxV=PxY 

V=PxY/M