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The Equation of Exchange: A Derivation

Author

Listed:
  • Hunte, C.K

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.

Suggested Citation

  • Hunte, C.K, 2011. "The Equation of Exchange: A Derivation," MPRA Paper 43531, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43531
    as

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    File URL: https://mpra.ub.uni-muenchen.de/43531/1/MPRA_paper_43531.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," Working papers 408, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. 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 377-392, August.
    4. 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 656-667, May.
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    More about this item

    Keywords

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

    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

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