AP Macro Chapter 17 formulas

Velocity Formula

V= PY/M

Quantity Equation

MV=PY or as your notes say MV=PQ. Both Q and Y represent output (real GDP). As you know, P x Y = nominal GDP (price times output)

The Quantity Theory in 5 Steps:
1. V is stable.

2. So, a change in M causes nominal GDP (P x Y) to change by the same percentage.

3. A change in M does not affect Y: money is neutral, Y is determined by technology & resources.

4. So, P changes by same percentage as P x Y and M.

5. Rapid money supply growth causes rapid inflation

To find the change in P, use this formula:

P=PY/Y (common sense right? the price level is the difference between nominal and real GDP (PY = nominal).

Once you know the change in price level, use the CPI or GDP deflator formula to figure the inflation rate.

Basically, it's current -previous/previous.....remember this from last semester????

ALWAYS REMEMBER:
Inflation…
raises nominal interest rates (Fisher effect) but not real interest rates
increases savers’ tax burdens
lowers the after-tax real interest rate