The Equation of Exchange: A Derivation
AbstractThis 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43531.
Date of creation: 26 Sep 2011
Date of revision:
Publication status: Published in The American Economist Number 2.LVII(2012): pp. 210-215
Equation of Exchange; money demand; income velocity; marginal propensity to consume;
Find related papers by JEL classification:
- A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-12 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Siklos, P.L., 1991.
"Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986,"
91150, Wilfrid Laurier University, Department of Economics.
- Siklos, Pierre L, 1993. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 377-92, August.
- Husted, Steven & Rush, Mark, 1984. "On measuring the nearness of near moneys revisited," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 171-181, September.
- 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, vol. 5(2), pages 656-67, May.
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