Home » %M + %V = %P + %Y Where M is M1, the money supply, V is the velocity of money (M1), P is the price level, and Y is real output.

# %M + %V = %P + %Y Where M is M1, the money supply, V is the velocity of money (M1), P is the price level, and Y is real output.

%ΔM + %ΔV = %ΔP + %ΔY

Where M is M1, the money supply, V is the velocity of money (M1), P is the price level, and Y is real output.

In the US, from 1959 to 1981, the following average annual percentage rates of change were calculated: %ΔM = 4.9% %ΔV = 3.3% %ΔP = 4.6% %ΔY = 3.6%

Suppose that inflation expectations, πe, are equal to 4.6% per year.

(1)   Your boss walks in and says: “Based on the information (above), if we raise the rate of growth of the money supply to 6.9% or 7% next year, can we get real output to rise and unemployment to fall? Short run? Long run? If short run, why? If long run, why?

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