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Does increase in money supply always lead to proportional increase in prices?
Wiki User
∙ 12y ago
An increase in money supply leading to an equal increase in prices is referred to as the "Quantity Theory of Money". To explain this theory, we first need to define the "velocity of circulation" and the "equation of exchange".
The velocity of circulation is the average number of times a dollar of money is used annually to buy GDP. But GDP equals the price level (P) multiplied by real GDP (Y). that is:
GDP = PY.
Call the quantity of money M. The velocity of circulation, V, is determined by the equation
V = PY/M
For example, if GDP is $900 billion (PY = $900 billion) and the quantity of money is $225, the velocty of circulation is 4. ($900billion divided by $225 billion equals 4).
The equation of exchange states that the quantity of money (M) multiplied by the velocity of circulation (V) equals GDP, or
MV = PY
This equation is always true - it is true by definition. With M equal to $225 billion, and V equal to 4, MV is equal to $900 billion, the value of GDP.
In this case, the equation of exchange tells us that a change in quantity of money brings about an equal change in the price level. You can see why by testing the equation by increasing the supply of money and price level by the same amount - the equation holds true.
Wiki User
∙ 12y ago
Wiki User
∙ 12y agoInflation
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What happens to prices if the supply is high?
The price will skyrocket, increase, go up.
What does an increase in supply of an item usually mean for a consumer?
lots of supply and low demand = lower prices lots of demand and low supply = higher prices demand and supply high = normal prices demand and supply low = normal prices
What causes an increase in supply?
An increase in prices --Danny R. (St. Petersburg, FL)
Using the demand and supply analysis try to describe the recent increase in wheat prices worldwide?
demand and supply analysis try to describe the recent increase in wheat prices worldwide
What can happen to prices in a competitive market when demand increases as supply remains the same?
increase in prices
Increase in money supply followed by an increase in prices?
inflation
What happens to prices if the supply is high?
The price will skyrocket, increase, go up.
When demand exceeds supply are there any instances where prices wouldn't be raised?
When demand exceeds supply, prices will usually increase. However, prices may not increase if the sellers are non-profit organizations.
What does an increase in supply of an item usually mean for a consumer?
lots of supply and low demand = lower prices lots of demand and low supply = higher prices demand and supply high = normal prices demand and supply low = normal prices
What causes an increase in supply?
An increase in prices --Danny R. (St. Petersburg, FL)
Using the demand and supply analysis try to describe the recent increase in wheat prices worldwide?
demand and supply analysis try to describe the recent increase in wheat prices worldwide
What happens to consumer surplus when demand increases?
Consumer surplus is the hypothetical monetary gain of consumers because they are able to buy a product for a price lower than they are originally willing to pay. When demand increases, supply (which is inversely proportional to demand) decreases, and as a result, prices increase. When prices increase, consumer surplus decreases.
What can happen to prices in a competitive market when demand increases as supply remains the same?
increase in prices
How is today's gold prices increase or decrease?
as with any product, prices will fluctuate with demand and supply. if the demand increases or supply is reduced, prices will rise. if demand falls or there surplus supply, the opposite also occurs.
If a supply-demand curve were applied to basic resources?
Their prices would increase.
If a supply-demand curve were applied to basic resource?
Their prices would increase.
When will gas prices increase?
Gas prices increase when the demand increases compared to the supply, or when the cost of oil increases (due to demand, or if raised arbitrarily by the producers).
