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Equation of Exchange
AP Macroeconomics
http://en.wikipedia.org/wiki/File:Stacks_of_money.jpg
Where we came from…
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We learned about the
properties, functions,
and definitions of
money.
How is money defined?
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M1 what’s included?
M2 what’s included?
Where are we going?
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In this lesson, we’ll
learn about the
relationship between
the money supply and
GDP.
The Equation of
Exchange is an
identity and provides
an understanding of
the relationship
between money and
economic activity.
http://www.writemoneyinc.com/
So what is this equation?
MV=PQ
This shows the relationship between money
supply, income velocity, the price level, and
real output.
Definitions
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Money supply (M) = stock of money
Income velocity (V) = income (GDP)
velocity of circulation, or average
number of times $1 is spent on final
goods and services in a time period.
(think rate of change)
Price level (P) = average price level
of final goods and services in GDP,
also known as the GDP deflator
Real Output (Q) = real output, the
quantity of goods and services in
GDP.
The equation of exchange is an
accounting definition or an identity: it
is always true.
http://agile101.net/2009/07/10/whats-my-team-velocity/
The outcome of changes in (M)
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For the most part, income
velocity is pretty
predictable; its value
remains in a narrow range
over many years.
Changes in (M) result in
changes in nominal GDP (P
x Q)
Depending on the state of
the economy, changes in
money supply can result in
changes in prices only,
output only, or some combo
of both.
http://www.languageguide.org/images/im/tools.png
Explain!
If the aggregate supply
curve is horizontal, an
increase in the money
supply will cause the
AD curve to shift to
the right, and only
output will increase.
http://www.analystnotes.com/user_register_form.php?ref=notes
Explain!
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If the AS curve is
vertical, an increase in
money supply will
cause the AD curve to
shift to the right, and
only price level will
increase.
http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mac/1930s/1930sA.html
Explain!
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If the AS curve is
positively sloped, an
increase in money
supply will cause the
AD curve to shift to the
right, and the economy
will experience
increases in both the
price level and output.
http://www.studyblue.com/notes/note/n/national-income-and-pricedetermination/deck/842177
And now…
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Some resources:
http://www.reffonomics.com/
Morton workbook Activity 36
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.