is it +ve or -ve? and the reson
I think it is -ve as MV=PY. Please someone correct me if I am wrong. money *velocity= nominal GDP velocity=nominal GDP/money so as the money demand increases velocity will decrease.
I want to know the reason… rus1bus can u pls help
par15 Wrote: ------------------------------------------------------- > I think it is -ve as MV=PY. Please someone correct > me if I am wrong. > > money *velocity= nominal GDP > velocity=nominal GDP/money > > so as the money demand increases velocity will > decrease. You are right only if the demand for money does not impact Real GDP or prices. However that would never be the case as per monetarists.
As per my understanding, Demand for Money and Velocity of Money would have +ve relationship. To explain this, lets first understand what is Demand for Money? It is the money that you keep with you in Cash or Cash Equivalents (like balance in your checking/current account). You are keeping this money to, say, to meet your routine monthly expenses. Now, when Velocity of Money in the economy increases, it increases the Effective Money Supply. Going by the equation MV = PY, increase in left side will affect in increase in Prices (on the right side), as output (Y) will be constant in short term. Now, with increased Prices, you will need to keep more Cash or Cash Equivalents with you to meet your SAME routine expenses. Thus, your demand for Money increases when Velocity increases.
Guys! I feel that I should intervene here before a lot of people get led in the wrong direction. First of all, there is no direct relationship between money demand and velocity. When they talk about the equation of exchange (MV = PY), the M refers to quantity of money, which is the money-market equilibrium quantity. M is determined by the intersection of money demand and money supply. In the short run, money market equilibrium determines interest rates. In the long run, money market equilibrium only determines price levels while it loanable funds demand and supply that determine long term interest rates. So theres two possibilities here Varun. If you were asking about the relationship between M as in quantity of money and the velocity, then there is a negative relationship. The math is the clearest way to remember that. If you were really asking about the relationship between the demand for money and velocity, then I am afraid there’s no clear answer. For the purposes of this exam, velocity of ciculation has changed over time due totechnological inovation in the financial services industry. (See reading 27- alternative monetary policy strategies - monetary base targetting rule). Under the quantity theory of money the velocity of circulation is assumed constant. Rus: I’ve mailed you on your gmail. Please check
Great explanation guys…Thanks a ton…!!!