Buy custom Relationship between the money supply and nominal GDP
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Business
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Number of pages / Number of words: |
13 / 3491 |
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Aggregate demand shows the combinations of the price level and level of output at which money markets and goods are simultaneously in equilibrium. In other words an increase in the money supply shifts the aggregate demand upward. Leaving out some elements of the aggregate demand and only studying money supply can help us discover our previous equation...
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If the central bank provides M dollars, then M x V = P x Y. we must then assume that V (the velocity of money) is constant. Therefore an increase in the money output shifts nominal GDP up. This different assumptions and theoretical evaluations and equations prove the previous equation, M = PY / V.
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