Lectures in Macroeconomics- Charles W. Upton

The Quantity Theory of Money

MV = PY

The Quantity Theory of Money

The Scenario

• The Money supply is doubled on Christmas Eve.

• The auctioneer has the job of putting the money market and the goods market back in equilibrium

The Quantity Theory of Money

The Scenario

• The Money supply is doubled on Christmas Eve.

• The auctioneer has the job of putting the money market and the goods market back in equilibrium

Money Supply = Money Demand

Y = C + I + G + (X-M)

The Quantity Theory of Money

The Y and M Curves

P

r

Y

M

Po

ro

The Quantity Theory of Money

The Y and M Curves

P

r

Y

M

Po

ro

Y Curve: The combinations of P and r that keep YS = YD.

Y = C + I + G + (X-M)

The Quantity Theory of Money

The Y and M Curves

P

r

Y

M

Po

ro

Y Curve: The combinations of P and r that keep YS = YD.

The Quantity Theory of Money

The Y and M Curves

P

r

Y

M

Po

ro

M Curve: The combinations of P and r that keep Money Demand = Money Supply

The Quantity Theory of Money

The Solution

P

r

Y

M

Po

ro

2Po

Y’

M’

The Quantity Theory of Money

The Solution

P

r

Y

M

Po

ro

2Po

Y’

M’

Doubling price level keeps money supply constant and wealth constant. Hence no real effect.

The Quantity Theory of Money

The Solution

P

r

Y

M

Po

ro

2Po

Y’

M’

Doubling price level keeps money supply constant and wealth constant. Hence no real effect.

Subsequent lectures will take us through the mechanics, but first a discussion of the Quantity Theory and the Quantity Equation

The Quantity Theory of Money

The Quantity Equation

tttSt YPVM

The Quantity Theory of Money

Velocity

• Speed with which money turns over.

tttSt YPVM

The Quantity Theory of Money

Velocity

• Speed with which money turns over.

• Irving Fisher

tttSt YPVM

The Quantity Theory of Money

A Little Manipulation

tttSt YPVM

The Quantity Theory of Money

A Little Manipulation

tttSt YPVM

1111 tttSt YPVM

The Quantity Theory of Money

A Little Manipulation

tttSt YPVM

1111 tttSt YPVM

MMM St

St 1

The Quantity Theory of Money

The Quantity Equation

)1)(1()1)(1(Y

Y

P

P

V

V

M

M

V

V

Y

Y

M

M

P

P

The Quantity Theory of Money

From the Quantity Equation to the Quantity Theory

• The Quantity Equation is a tautology

The Quantity Theory of Money

From the Quantity Equation to the Quantity Theory

• The Quantity Equation is a tautology

• But what about V? Here, we get to the Quantity Theory

M

PYV

The Quantity Theory of Money

From the Quantity Equation to the Quantity Theory

• The Quantity Equation is a tautology

• But what about V? Here, we get to the Quantity Theory

M

PYV

0V

V

The Quantity Theory of Money

From the Quantity Equation to the Quantity Theory

Y

Y

M

M

P

P

V

V

Y

Y

M

M

P

P

The Quantity Theory of Money

Are We Done Yet?

The Quantity Theory of Money

Are We Done Yet?

• Evidence

• Qualifications

• Manipulation

• Application

The Quantity Theory of Money

End

©2003 Charles W. Upton. All rights reserved