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The Quantity Theory of Money&Mathematical Note:The Money Multiplier…
The Quantity Theory of Money&Mathematical Note:The Money Multiplier
The Quantity Theory of Money
Calculate
Calling the price level P
Calling the quantity of money M
Calling the velocity of circulation V
function
V = PY ÷ M
The equation of exchange states that
MV = PY
Expressing the equation of exchange in growth rates
Money growth rate + Rate of velocity change= Inflation rate +Real GDP growth
Rearranging:
Inflation rate = Money growth rate + Rate of velocity change- Real GDP growth
Mathematical Note:The Money Multiplier
definition: to see how the process of money creation works
the size of the money multiplier dependson
the currency drain ratio(C/D)
the desired reserve ratio(R/D)
function: Money multiplier=(1+C/D)/(C/D+R/D)