馃攳
Quantity theory of money | AP Macroeconomics | Khan Academy - YouTube
Channel: Khan Academy
[0]
in this video we're going to talk about
[1]
the quantity theory of money which is
[3]
based on what is known as the equation
[5]
of exchange and it tries to relate the
[8]
money supply m
[10]
so this is some measure of the money
[12]
supply
[14]
with
[15]
the
[16]
real gdp
[18]
y so that is real
[20]
gdp
[21]
and the price level p
[24]
so this is price
[26]
level and we'll try to make this
[27]
tangible in a second and then it also
[29]
introduces this idea of the velocity of
[33]
money which is a measure of how much
[35]
that money supply is how quickly is it
[38]
circulating if there's a dollar out
[39]
there how many times per year is it
[41]
actually changing hands velocity of
[44]
money
[45]
and the equation of exchange that is
[48]
used in the quantity theory of money
[50]
relates these as following
[52]
that the money supply
[55]
times the velocity of money
[58]
is equal to
[60]
your price level
[62]
times your real gdp and we could view
[65]
this on a per year basis
[67]
so let's make this a little bit tangible
[70]
and actually let's try to make it
[71]
tangible by making velocity tangible
[73]
let's say we are in a world where
[76]
we have whatever we're using for m
[78]
whatever measure of our money supply
[80]
let's say it says that we have 10
[83]
billion it's a relatively small economy
[84]
right over that is our money supply and
[87]
let's say that our real gdp in this
[90]
economy this year
[91]
is going to be
[94]
100 billion
[95]
100 billion i'll just call it per
[98]
year
[99]
and let's say the price level and this
[101]
is usually some type of index this is
[104]
1.1
[107]
so one way to think about it if you take
[109]
your price level times your real gdp
[112]
so if you take this product right over
[114]
here that's going to give you your
[115]
nominal gdp
[117]
nominal
[119]
gdp where if this was 1.0 that would be
[122]
in reference to some year that you
[124]
consider your base year so this would be
[126]
your real gdp in terms of that base year
[128]
and then you would multiply it times
[130]
this right over here to get your nominal
[133]
gdp
[134]
but given this information pause this
[136]
video and try to figure out what the
[138]
velocity of money would be for that year
[141]
well this is relatively straightforward
[143]
algebra to solve for v we just divide
[145]
both sides by m
[147]
and we would get that our velocity of
[150]
money in this year is equal to our price
[153]
level
[154]
times our real gdp
[157]
divided by
[158]
our
[159]
amount of money
[161]
and so this is going to be equal to
[164]
we have
[165]
1.1
[167]
times
[168]
100 billion
[170]
100
[171]
billion dollars per year
[174]
divided by 10 billion dollars divided by
[178]
10 billion dollars so what is this going
[181]
to be 1.1 times 100 is 110 divided by 10
[186]
is 11. so we are going to get this is
[189]
going to be equal to
[190]
11. the dollar units would actually
[193]
cancel out and all you're left with if
[195]
you try to look at the units is 11 times
[198]
per
[199]
year and so one way of interpreting this
[202]
is for these numbers your average dollar
[206]
is going to circulate 11 times per year
[208]
if this idea still seems too abstract to
[212]
you think of it this way let's have an
[214]
extreme economy where we only have two
[216]
parties and let's assume
[219]
that our price level is just a simple
[222]
one in which case our real gdp would be
[224]
the same as our nominal gdp and let's
[227]
say that our gdp this year is 100
[230]
billion dollars 100 billion dollars per
[232]
year
[234]
and let's take an extreme situation
[236]
where
[237]
the amount of money that we have is
[240]
also 100 billion
[242]
well this would be a world if there's
[243]
only two people in this economy where
[245]
maybe this person just pays that person
[248]
100
[249]
billion dollars in order to get that
[252]
much worth of output
[254]
and so every dollar has just switched
[256]
hand once so the velocity of money in
[258]
this situation it would be just one time
[261]
per year but imagine another scenario
[263]
where instead of m being equal to 100
[266]
billion dollars imagine a situation
[268]
where m is equal to
[271]
one dollar
[273]
where there's only one dollar there you
[275]
could still have a gdp of a hundred
[277]
billion dollars because that one dollar
[279]
could just switch hands a hundred
[281]
billion times it would happen it would
[283]
have to happen quite rapidly for it to
[285]
all happen in the year but this person
[287]
could buy a dollar's worth of goods and
[288]
services from this person and that
[289]
person buys a dollar's worth of goods
[290]
from that person and it would go back
[292]
and forth 100 billion times and so in
[295]
this situation where you still have the
[298]
same real and actually nominal gdp if
[301]
your amount of money is 1 100 billion
[305]
then your velocity would have to be 100
[307]
billion times higher
[309]
now the folks who like to think about
[311]
this equation of exchange and the
[313]
quantity theory of money they're often
[316]
known as monetarists
[319]
and monetarists believe that inflation
[322]
is fundamentally a monetary phenomena
[326]
that if you increase the money supply
[328]
that that's going to lead to increased
[329]
inflation and if you decrease the money
[331]
supply that might slow inflation or even
[334]
result in deflation
[336]
so if you want to think about inflation
[338]
in terms of money we could solve for p
[341]
from this equation so to solve for p we
[343]
would just divide both sides by our real
[345]
gdp
[346]
and so you would get
[348]
your price level is equal to the amount
[352]
of money
[354]
times your velocity
[356]
times your velocity divided by
[359]
divided by
[360]
real gdp and these monetarists will
[363]
assume that velocity is constant
[366]
although folks theorize that maybe it's
[368]
not constant that technology for example
[371]
might make it a little bit easier to
[372]
transact which might make velocity
[374]
increase there could also be a world
[376]
where just people's mindsets make them
[378]
want to transact more or less which
[380]
could change velocity but monetarists
[382]
tend to assume that this is constant
[384]
because it frankly allows you to make
[386]
conclusions from this equation of
[388]
exchange
[389]
and monetarists also assume that changes
[392]
in the money supply will not have an
[394]
impact on real output in the long run
[398]
so not
[399]
impacted
[401]
impacted
[403]
by
[404]
m
[405]
in
[406]
the
[407]
long run
[408]
well if you assume that these two things
[410]
are relatively constant well then you
[412]
will see this direct relationship
[414]
between your price level and the
[417]
quantity of money now in practice this
[420]
is likely to be an oversimplification
[422]
like most of our economics models
[425]
for example coming out of the last
[426]
recession of 2008-2009
[429]
the federal reserve practiced
[431]
quantitative easing where they
[433]
dramatically increased the money supply
[436]
right over here but we did not see a
[438]
commensurate dramatic increase in
[441]
inflation in the price level now some
[443]
folks could argue that when the federal
[445]
reserve in 2008 dramatically increased
[448]
the money supply without a dramatic
[450]
increase in price levels it might have
[452]
been because the velocity of money went
[455]
down that people weren't actually
[457]
transacting with all of that money that
[459]
was being injected into the system who
[462]
knows and if you're always able to use
[464]
velocity is a bit of a fudge factor well
[466]
then it puts into debate of how useful
[468]
this might be but needless to say it is
[471]
an interesting model to at least think
[473]
about that if the money supply were to
[476]
increase dramatically and people
[477]
transact at roughly the same rate but
[479]
the actual output that the economy is
[481]
producing isn't changing it makes some
[483]
level of common sense that maybe that
[485]
would increase the price level you'd
[487]
have more money chasing the same output
Most Recent Videos:
You can go back to the homepage right here: Homepage