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The Monetary Equation of Exchange

The Monetary Equation of Exchange. Relating Money to GDP. Economist, Irving Fisher postulated that : Nominal GDP = The Money Supply * Money’s Velocity. The Monetary Equation of Exchange. MV = PQ M = money supply (M1 or M2) V = money’s velocity (M1 or M2)

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The Monetary Equation of Exchange

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  1. The Monetary Equation of Exchange

  2. Relating Money to GDP • Economist, Irving Fisher postulated that : Nominal GDP = The Money Supply * Money’s Velocity

  3. The Monetary Equation of Exchange • MV = PQ • M = money supply (M1 or M2) • V = money’s velocity (M1 or M2) • P = price level (PL on the AS/AD diagram) • Q = real GDP ( sometimes labeled Y on the AS/AD diagram) • P*Q or PQ = Nominal GDP

  4. The Monetary Equation of Exchange • MV=PQ • M1=$2 trillion • V of M1 = 7 • PQ = $14 trillion LRAS SRAS PL P AD QF GDPR

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