Reflection of the three situations (ideal, deflationary, and inflationary) in the money equation (Ť = 1000, MV = Demand, and PT = Supply)
- Ideal situation
Demand
Supply
MV
=
PŤ
(Ť – maximum GDP)
50 X 20
=
1 X 1000
- Deflationary situation
Demand
Supply
MV
=
PŤ
40 X 20
=
1 X 800
- Inflationary situation
|
Demand |
|
Supply |
|
|
MV |
= |
PŤ |
(Ť – maximum GDP) |
|
60 X 20 |
= |
1.2 X 1000 |
|
Explanation: The quantity of goods cannot rise above 1000, which is the maximum that the economy can produce. Prices therefore rise from 1 to 1.2, in order to establish equality between the two sides of the equation.
