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Money supply and int rate 0810
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Money supply and int rate 0810

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Money supply and int rate 0810 Money supply and int rate 0810 Presentation Transcript

  • Inflation and Money Supply
  • Quantity Theory of Money
    • MV=PY
    • Where M= nominal money supply
    • V=velocity of money (no. of times the stock of money is turned over per year)
    • P= price level in the economy
    • Y= real output in the economy
    • Price level P is proportional to the money supply M
    • Income velocity of money is the ratio of nominal GDP to the nominal money stock
    • V= Y/ (M/P)
  • Measures of money supply
    • M1- currency in circulation + demand deposits in banks + other deposits with RBI
    • M3= M1 + time deposits with banks
    • M4- M3 + post office savings deposits
  • Inflation and Money Supply
  • Interest Rates
    • Interest rates exist because of inflation
    • Real interest rates and nominal interest rates
    • R=i-∏
    • Where
      • R= real interest rate
      • i= nominal interest rate
      • ∏ - expected inflation
  •