Correlation Between General Price Level And Money Supply, By Milton Friedman

1497 Words 6 Pages
Milton Friedman argues that the correlation between general price level and money supply is captured using the economic equation of exchange. MV=PY where Money supply/Quantity of money. On the other hand, V=Velocity of money circulation, while P and Y represent General Price and Real national income respectively. The according to Milton Friedman, the equation means that the total value of the quantity of money multiplied by velocity equals the money value acquired at the output. Regarding the equation of exchange, Velocity is presumed to remain constant. On the other hand, changes in M produce a similar change in the price level. In the vent of economic changes to full employment the degree of output changes in y. Every change cause change in P.
This approach of the quantity theory of money specified a proportionality theory. The general price level ought to vary proportionally with the variations of the money supply. For instance, if there is an increase in 10 percent quantity of money there is an increase of equivalent 10 percent in rising general price. The relationship between money supply prevailing rate and the real income happens only when the velocity of funds remains stable. Consequently, velocity lies at the center of the link. When we consider the equation, the growth of income result in growth in the price level and real national income. The results rely on the condition of the economy. The effect of a certain change in the quantity of money on the price

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