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Hello students in this video we will discuss about quantity theory of money.
00:12
So in this theory it is a proposition used in long run where it is assumed that the increase in the quantity of money increase in quantity of money in percentage would bring an equal percentage change in the price level.
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The quantity of money is denoted by capital m.
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And the further classification under quantity theory of money is velocity of circulation.
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By velocity of circulation, we understand that, that at what velocity or at what speed the money is being circulated in a particular country.
01:05
So, it is computed as follows price level into gdp.
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So, this is the price level which is denoted by capital p and this is real gdp of a country which is denoted by capital y.
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Now let's take a hypothetical example to understand that how the quantity of money and velocity of circulation could be computed from a given data.
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And also the velocity of circulation is denoted by capital v and the formula for computation is such that quantity of money into velocity of circulation is equivalent to price level into real gdp.
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Now let's understand the situation with the help of an example.
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In this mv is equal to p y.
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Now let's say quantity of money is unknown to us and we are taking velocity as 20.
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The price level is 2 whereas the gdp or the real gdp is 400 so the m would be 40 so this is the quantity of money which is calculated for year 1 and in year 2 the quantity of money let's suppose it is increased by 20 % so in year 2 the quantity of money would result in this is in dollar millions so this could be in dollar 48 millions as in this particular example we have assumed that the real gdp remains the same at its full employment level and also the velocity of circulation also remains unchanged now let's say we have to compute the price level changes from the very same situation so let's say mv is equal to to py or we have to understand the price level changes in second year.
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So the quantity of money is 48.
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Velocity is 20.
03:40
Price level changes is what is meant to be computed...