money equation

CFA Level I Economics
#1

i really do not get the import of this equation MV=PY and how the various constituents affect each other (ie the relationship). cam someone please elaborate.

#2

Do an example:

  • Y = 36; the economy produces 36 goods during the year
  • P = 10; each good costs $10
  • M = 90; there are 90 one-dollar bills in circulation
  • V = 4; each dollar bill is spent, on average, 4 times during the year

Now start fiddling:

  • If M increases to 120 one-dollar bills in circulation, then:
    • Output might increase to 48 goods, at the same price level, with the same velocity
    • P might increase to $13.33 per good, at the same output level, with the same velocity
    • V might drop to 3 times per year, at the same output level and price level

You can try fiddling with the other variables.

#3

thanks. you really simpliy the complicated

#4

I try.