Economics Part B

Money Equation

Reflection of the three situations (ideal, deflationary, and inflationary) in the money equation  (Ť = 1000, MV = Demand,  and PT = Supply)

  1. Ideal situation

    Demand

     

    Supply

     

    MV

    =

    (Ť – maximum GDP)

    50 X 20

    =

    1 X 1000

  2.  Deflationary situation

    Demand

     

    Supply

     

    MV

    =

    40 X 20

    =

    1 X 800

     

  3. Inflationary situation

Demand

 

Supply

 

MV

=

(Ť – maximum GDP)

60 X 20

=

1.2 X 1000

 

Explanation: The quantity of goods cannot rise above 1000, which is the maximum that the economy can produce. Prices therefore rise from 1 to 1.2, in order to establish equality between the two sides of the equation.

Money Equation 529Money Equation