Consider the equation %ΔM + %ΔV ≈ %ΔP + %ΔY. If the velocity of money does not change (%ΔV = 0), and the change in real GDP exactly keeps pace with the change in the money supply (%ΔM = %ΔY), what will happen to the price level (P)?

This is because the % change in money supply is the only variable that is on the left side of the equation. For it to be equal to % change in real GDP on the right side of the equation then ONLY the % change in real GDP can exist on the right side. Which means that %ΔP has to be 0 as well.

For example, assume both %ΔM and %ΔY are 2 and %ΔP is 1

%ΔM = %ΔY

2 ≠ 2 + 1

The equation is not satisfied.

Now assume %ΔP = 0.

2 = 2 + 0.

Equation is satisfied.

Seeing as %ΔP is 0 that means there is no change in Prices so the Price Level stays the same.

tallinn tallinn · Answer 2 · 2022-03-22T20:41:31+01:00

When The Equation is satisfied %ΔP is = 0 norms there is no change in Prices so the Price Level stays the same.

What is Real GDP?

We are given the ensuing formula,

After that %ΔM + %ΔV ≈ %ΔP + %ΔY

And also the told that is,

Then %ΔV is = 0

After that %ΔM is = %ΔY

When If that is the case Thus then the new procedure should be written as follows,

Then %ΔM is = %ΔY

This is because the % change in money supply is the greatest variable that is on the left flank of the equation. For it to be equal to the % change in real GDP on the right side of the equation then Exclusively the % change in real GDP can exist on the right side. This indicates that %ΔP has to be 0 as well.

For illustration, consider both %ΔM and %ΔY are 2 and %ΔP is 1

Then %ΔM = %ΔY

After that 2 ≠ 2 + 1

Then The equation is not satisfied.

Now we assume that %ΔP = 0.

Then 2 = 2 + 0.

Thus, The Equation is satisfied.

Then Noticing as %ΔP is 0 means there is no change in Prices so the Price Level stays identical.

Find more information about Real GDP here:

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