Monetary Equation of Exchange

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Presentation transcript:

Monetary Equation of Exchange AP Macro © Robin Foster Econ 2301

Relating Money to GDP The Fisher Effect Nominal GDP = The Money Supply x Money’s Velocity

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

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