It is straightforward to use the quantity theory of money
MV = PY
to calculate the price level. For example, in the third quarter of 1998 real GDP (in chained 1992 dollars) was equal to $7 566 billion, the M1 measure of the money stock was equal to $1 072 billion, and the velocity of money was equal to 7.964. Therefore:
P = MV/Y= (1 072 x 7.964)/7 556 = 1.1284
It means thaat in the third quarter of 1998, the price level was 112.84% of its 1992 level, which works out to an average rate of inflation of about 2.14 percent per year from 1992 to 1998.
Had velocity grown an additional 10 percent between 1992 and 1998, the price level would have grown an additional 10 percent as well if the money stock and real GDP were unchanged from their historical values. And had real GDP grown by an additional 10 percent between 1992 and 1998, this would have reduced the 1998 price level by 10 percent relative to its historical value if velocity and the money stock were unchanged from their historical values.
Mis en ligne le 03/01/2008 par Pierre Ratcliffe. Contact: (pratclif@free.fr) sites web http://paysdefayence.blogspot.com et http://pierreratcliffe.blogspot.com