Relationship Between the Money Supply and Nominal Gdp

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Relationship Between the Money Supply and Nominal Gdp

By | March 2008
Page 1 of 9
I.Introduction to hypothesis

In estimating the relationship between the money supply and nominal GDP we look into the past to find the many different ways that the great economists of the past studied this relationship. The first thing to understand is that money supply should be considered the same thing as money demand, this happens in our equilibrium society that I am using for this paper. Therefore anytime equations may differ depending on money supply and money demand we will just assume that they mean the same thing in that M = M , but only in a equilibrium economy. Lets attempt to assume equilibrium for the ease of the equations at hand. Next we must understand a basic money supply equation, in which the money supply is equal to the price level multiplied by income and that number is then divided by the velocity (or the number of times per year a dollar turns over). The equation would look like this:

M = PY / V
The relationship between money supply (M ) and nominal GDP (PY), should be looked at as either PY is a function of M (or M ) or that Ms is a function of PY. Combining these we can find the M by making M a function of P and Y. Of course I will try to use the other economists and other literature sources to prove this hypotheses. For instance the classical economists believed that money was a function of price and the output level. Price and output give you nominal GDP, therefore they thought that money supply was a function of (simply enough) the nominal GDP. Keynes changed that thought to state that the money supply was a function of price and the incomes. My argument is the derived oppisite of the classical in that the nominal GDP is a function of the money demand. Therefore the dependent variable running would be GDP as the equation might start as: PY= f(M ).

II.Theoretical rationale

Theoretically this study is important to develop and understanding of why a county would decide to supply more or less money to its citizens in...