EC202 1nd Edition Lecture 32Outline of Last Lecture I. Nominal interest rateII. Federal funds rateOutline of Current Lecture II. Velocity of moneyIII. Equation of exchangeCurrent Lecture-To calculate the velocity of circulation:-Divide nominal GDP by the quantity of money -The velocity of money = V-The quantity of money = M-The price level = P-Real GDP = Y-Then nominal GDP is P ´ Y, and the velocity of circulation is-V = (P ´ Y) ¸ M-Multiply both sides by M to obtain the equation of exchange, which states that the quantity of money multiplied by the velocity of money equals nominal GDP -M ´ V = P ´ Y-Divide both sides of the above equation by Y to obtain-P = (M ´ V) ¸ Y-long run inflation rate-P = (M ´ V) ¸ YThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-On the left is the price level -On the right are all the things that influence the price level -In the long-run, velocity does not change when the quantity of money changes (Quantity Theory of Money) -Real GDP grows at a pace that is independent of the changes in the quantity of money -P = (M ´ V) ¸ Y*-If the Fed makes the quantity of money grow at the same rate as the growth rate of potential GDP, the price level remains constant -In the long run, the inflation rate equals the growth rate of the quantity of money minus the growth rate of potential GDP-Gr(P) = Gr(M) + Gr(V) – Gr(Y*)-Where Gr means “growth rate of”-Gr(P) = the inflation rate
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