TAILIEUCHUNG - Lecture Economics (6/e): Chapter 15 - Stephen L. Slavin

The main contents of this chapter include all of the following: The equation of exchange, the quantity theory of money, classical economics, the monetarist school, supply-side economics, the rational expectations theory. | Chapter 15 Twentieth-Century Economic Theory Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-1 Chapter Objectives The equation of exchange The quantity theory of money Classical economics Keynesian economics The monetarist school Supply-side economics The rational expectations theory 15-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Equation of Exchange Much of the Keynesian-Monetarist debate revolves around the quantity theory of money which itself is based on the equation of exchange The equation of exchange and the quantity theory of money are easy to confuse Perhaps because the equation of exchange is used to explain the quantity theory of money 15-3 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Equation of Exchange The equation of exchange is MV = PQ M is the total dollars in the nation’s money supply V is the number of times per year each dollar is spent P is the average price of all the goods and services sold during the year Q is the quantity of goods and services sold during the year 15-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-5 The Equation of Exchange M times V (MV) would be total spending. Total spending by a nation during a given year is GDP. Therefore, MV = GDP P times Q (PQ) is the total amount of money received by sellers of all final goods and services produced by a nation during a given year. This also is GDP. Therefore, PQ = GDP Things equal to the same thing are equal to each other, therefore, MV = PQ Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15-6 The Equation of Exchange The following example will be in billions of dollars without the dollar signs MV = PQ 900 X 9 = PQ 8,100 = PQ 8,100 = 81 X Q 8,100 = 81 X 100 8,100 = 8, 100 The equation of exchange must always balance, as must all equations. The Quantity Theory of Money .

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