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### 10 Cards in this Set

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 monetary theory study of effect of money on the economy velocity of money avg # of times a dollar is spent in buying the total amt of goods and services produced in the economy V=PxY/M equation of exchange relates nominal income to quantity of \$ and velocity MxchangeV = PxchangeinY quantity theory of money nominal income is det. solely by movements in the quantity of money quantity theory of money demand M = 1/V x PY when in eq., Md = k x PY, velocity is constant demand for money is a function of income, and interest rates have no effect on Md Is velocity constant? no; declines during recessions and increases during expansions Liquidity Preference theory motives: transaction, precautionary, and speculative Md/P is a function of interest rate and income transactions motive indiv. hold \$ b/c it is a medium of exchange that can be used to cary out everyday transactions; transactions are proportional to income higher the nominal interest rate, less hold as money, higher the velocity of money Transactions D for money as i increase as transactions costs decr. Md dec., V incr. speculative motive if indiv. believe i is below normal value, will expect i to rise iand future and would rather hold their wealth as money then bonds; Md will be high