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Econ 100b

Created 4/30/1996
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Money, Velocity, and Inflation

(Economics 100b; Spring 1996)

Professor of Economics J. Bradford DeLong
601 Evans, University of California at Berkeley
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

February 7, 1996


Products and Percentage Changes

There is a box on page 150 of Mankiw's textbook that--very quickly--runs through "an arithmetic trick that is useful to know: the percentage change of a product of two variables is approximately the sum of the percentage changes in each of the variables."

It is worth going through this in somewhat more detail, as it is the key to getting from the quantity equation:

M V = P Y

where M is the money stock, V is the velocity of circulation, P is the overall price level, and Y is the level of output, to the equation for the inflation rate:

Inflation (in % per year) = Money Growth (in % per year) + Velocity Growth (in % per year) - Output Growth (in % per year)

First, a caveat:


Second, let's run through the math:


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/