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Chapter 26: Problem 7

Based on the equation of exchange, the money supply in the economy is calculated as a. \(M=V / P Q\) b. \(M=V(P Q)\) c. \(M V=P Q\) \(\mathrm{d} . M=P Q-V\)

Short Answer

Expert verified
Based on the equation of exchange, the money supply in the economy is calculated as \( M V = P Q \).

Step by step solution

01

We have four variables in the equation of exchange: 1. Money supply (M): The total amount of money available in an economy. 2. Velocity of money (V): The average number of times one unit of money is used to purchase goods and services per time period. 3. Price level (P): The overall level of prices in the economy, typically measured by a consumer price index or producer price index. 4. Output (Q): The total quantity of goods and services produced in the economy. With these variables, let's analyze each of the given equations. #Step 2: Analyze Equation a#

Equation a is given by: $$ M = \frac{V}{P Q} $$ Here, M is expressed as the fraction \(\frac{V}{PQ}\). This equation suggests that the money supply equals the velocity of money divided by the product of the price level and output. This equation is not consistent with the equation of exchange, which states that the money supply multiplied by the velocity of money equals the nominal GDP, which is the product of the price level and output. #Step 3: Analyze Equation b#
02

Equation b is given by: $$ M = V(PQ) $$ In this equation, M is expressed as the product of V and PQ, which implies that money supply equals the velocity of money multiplied by the product of the price level and output. This equation is also inconsistent with the equation of exchange. #Step 4: Analyze Equation c#

Equation c is given by: $$ M V = P Q $$ This equation states that the money supply multiplied by the velocity of money equals the product of the price level and output, which is the nominal GDP. This equation is consistent with the equation of exchange, meaning that Equation c is the correct answer. #Step 5: Analyze Equation d#
03

Equation d is given by: $$ M=PQ-V $$ In this equation, M is expressed as the difference between the product of the price level and output and the velocity of money. This equation is not consistent with the equation of exchange. Therefore, it is not the correct answer. #Conclusion#

Based on our analysis, the correct equation for the equation of exchange is given by Equation c: $$ M V = P Q $$

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Most popular questions from this chapter

Which of the following is \(n o t\) an issue in the Keynesian-monetarist debate? a. The importance of monetary versus fiscal policy b. The importance of a change in the money supply c. The importance of the crowding-out effect d. All of the above

Starting from an equilibrium at \(E_{1}\) in Exhibit \(12,\) a rightward shift of the money supply curve from \(M S_{1}\) to \(M S_{2}\) would cause an excess a. demand for money, leading people to sell bonds. b. supply of money, leading people to buy bonds. c. supply of money, leading people to sell bonds. d. demand for money, leading people to buy bonds.

A decrease in the interest rate, other things being equal, causes a (an) a. upward movement along the demand curve for money. b. downward movement along the demand curve for money. c. rightward shift of the demand curve for money. d. leftward shift of the demand curve for money.

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people a. increase the supply of bonds, thus driving up the interest rate. b. increase the supply of bonds, thus driving down the interest rate. c. increase the demand for bonds, thus driving up the interest rate. d. increase the demand for bonds, thus driving down the interest rate.

Keynes gave which of the following as a motive for people holding money? a. Transactions demand b. Speculative demand c. Precautionary demand d. All of the above
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