Question

Between the first quarter of 1982 and the first quarter of 2020, the year-over-year growth
rates of real GDP, the consumer price index, and M2 were 2.7, 2.8, and 5.9 respectively.
Given this information, what must be true for the quantity theory of money to hold? Show
your work.

Answer 1

According to the quantity theory of money,

% change in real GDP + % change in price level = % change in Velocity + % change in the money supply

% change in real GDP = Annual real GDP growth rate = 2.7%

% change in the price level = Annual % change in the CPI = 2.8%

% change in the money supply = Annual % change in M2 = 5.9%

Substituting the above values in the equation of exchange, we obtain

2.7% + 2.8% = % change in velocity + 5.9%

=> % change in velocity = 2.7% + 2.8% - 5.9% = -0.4%

Ans: For the quantity theory of money to hold, the year-on-year change in the velocity of money = -0.4%

answered by: anonymous