The Equation of Exchange: A Derivation
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.
|Date of creation:||26 Sep 2011|
|Date of revision:|
|Publication status:||Published in The American Economist Number 2.LVII(2012): pp. 210-215|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- 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.
- 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.
- James M. Poterba & Julio J. Rotemberg, 1986.
"Money in the Utility Function: An Empirical Implementation,"
408, Massachusetts Institute of Technology (MIT), Department of Economics.
- James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," NBER Working Papers 1796, National Bureau of Economic Research, Inc.
- 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.
- Siklos, P.L., 1991. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Working Papers 91150, Wilfrid Laurier University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43531. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.