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# Money supply and int rate 0810

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### Money supply and int rate 0810

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