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The Equation of Exchange: A Derivation

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  • Hunte, C.K
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    Abstract

    This paper provides a theoretically plausible model to explain the equation of exchange, deriving it from an agent's utility maximization problem and the profit maximization behavior of a competitive firm. It shows that the marginal propensity to consume is constant, while the average propensity to consume is decreasing as income increases. Supporting the notion that consumption growth is positively related to income growth, it confirms that the marginal propensity to consume has a theoretical basis for modifying velocity, money demand and consumption,given that money demand is inversely related to the interest rate and positively related to income.

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    File URL: http://mpra.ub.uni-muenchen.de/43531/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43531.

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    Date of creation: 26 Sep 2011
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    Publication status: Published in The American Economist Number 2.LVII(2012): pp. 210-215
    Handle: RePEc:pra:mprapa:43531

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    Keywords: Equation of Exchange; money demand; income velocity; marginal propensity to consume;

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    1. Siklos, P.L., 1991. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Working Papers, Wilfrid Laurier University, Department of Economics 91150, Wilfrid Laurier University, Department of Economics.
    2. Husted, Steven & Rush, Mark, 1984. "On measuring the nearness of near moneys revisited," Journal of Monetary Economics, Elsevier, Elsevier, vol. 14(2), pages 171-181, September.
    3. Klein, Benjamin, 1973. "Income Velocity, Interest Rates, and the Money Supply Multiplier: A Reinterpretation of the Long-Term Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 5(2), pages 656-67, May.
    4. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 408, Massachusetts Institute of Technology (MIT), Department of Economics.
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