What is the equation of exchange? What are the variables, which are in it, and how do they relate to each other?
The equation of exchange can be written as M V = P Q where M = money supply, V = velocity (the speed at which money circulates in the economy), P = the price level of GDP, and Q = the level of real GDP. P Q, therefore, is nominal GDP.
As written, the equation is an accounting identity, and embodies no economic theory. When assumptions are made regarding how variables act or react, the equation of exchange can become the basis for economic theory.
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Answer the following statement true (T) or false (F)
Refer to the accompanying figure. When the price is equal to 8, the price elasticity of demand for the demand curve D1 is ________ and for D2 the price elasticity of demand is ________.
A. 4; 4 B. 4; 1 C. 1; 4 D. 2; 4