Suppose that Mary-Anne spends 10 on a cup of Italian coffee....

Suppose that Mary-Anne spends $10 on a cup of Italian coffee. The money she spends becomes income to the coffee shop owner, who spends it on a burger. That money then becomes income to Tom who works as a waiter at the burger restaurant. Tom then uses it to pay for a newspaper. This process of the dollar being spent, becoming income, and then being spent repeatedly on final goods and services is the basis of the concept of: a. inflationary money. b. quantity spending. c. the velocity of money. d. revolving spending. e. the quantity theory of money.

Transcript

00:01 So let's just start with some definitions.

00:02 The equation of exchange is the very simple identity.

00:07 Mv equals py, right? py equals nominal gdp.

00:10 It's the amount of final goods and services transacted.

00:14 Mv is how often money is used to buy final goods and services.

00:18 So mv is total money used.

00:21 Py is total money used.

00:22 These things have to be identical by definition.

00:25 The simple quantity theory is a proposition about how this equation behaves, right? we've got four variables and only one equation, so there's no unique solution, right? if one of these variables can change, there are many ways the other variables can change to keep the equation balanced.

00:42 The simple quantity theorem says that changes in m lead to changes in p and only p, right? so we get a 5 % increase in money, we get a 5 % increase in prices, and we get minus 10 % in money, we get minus 10 % in prices, right? we need to know these definitions.

01:02 So a, let's work through all of these.

01:07 Equation assumes v constant.

01:12 This is incorrect.

01:15 The equation doesn't assume anything.

01:17 The equation is just a statement of what has to balance.

01:21 The simple quantity theory is a theory about how the different parts of the equation will behave.

01:28 But the equation itself does not make any assumption itself.

01:38 So no assumption is going to be made by this equation...

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