Monetary Policy and the Fed

Key Takeaways

• The equation of exchange can be written MV = PY.
• When M, V, P, and Y are changing, then %ΔM + %ΔV = %ΔP + %ΔY, where Δ means “change in.”
• In the long run, V is constant, so %ΔV = 0. Furthermore, in the long run Y tends toward Y_P, so %ΔM = %ΔP.
• In the short run, V is not constant, so changes in the money supply can affect the level of income.