In the equation ππ = ππ, π ππππππ πππ‘π
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- Money supply
- Money demand
- Maximum output
- Minimum output
Correct answer: a. Money supply
Answer Explanation
This equation is derived from the Quantity Theory of Money, a fundamental concept in monetary economics. The variable M represents the money supply. Based on this theory, total nominal spending in an economy equals nominal output or national income (PY). Understanding how the money supply works and how it affects the economy can give us valuable insights into monetary policy and how it works.
The money supply is the total amount of money available at a given point in time in an economy. With their monetary policy tools, central banks control the money supply through the circulation of currency, demand deposits in banks, and other liquid assets that can be easily converted into cash.
Various macroeconomic variables, such as inflation, interest rates, and economic growth, are affected by the money supply, which can have significant effects on aggregate demand.
Why the other answers are not correct
b. Money demand:
The M in equation MV = PY does not represent money demand. It refers to the desire for individuals and businesses to hold money as a store of value or to use it in transactions. In the equation MV = PY, money demand is not explicitly represented by any variable. It is influenced by factors such as interest rates, inflation expectations, and the level of economic activity.
c. Maximum output
In the equation MV = PY , the variable M does not represent maximum output. The variable Y represents the total nominal output or national income. It does not denote the concept of maximum output. According to the equation, nominal spending (MV) and nominal output (PY) are equal, but it does not specify the level of maximum output.
d. Minimum Output
In the equation MV = PY, the variable M does not represent the concept of minimum output. The equation shows the relationship between the money supply (M), velocity of money (V), price level (P), and national income (Y), but it does not provide information about the minimum level of output.
Conclusion
According to the Quantity Theory of Money, the equation MV = PY describes the relationship between the money supply (M), the velocity of circulation of money (V), the price level (P), and total nominal output (Y) in an economy. M is the variable representing the total amount of money available in the economy, so option (a) is the correct answer to this question.
In monetary policy and economic analysis, the Quantity Theory of Money provides valuable insights into the interplay between the money supply, price level, and economic output.
In the equation ππ = ππ, π ππππππ πππ‘π
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.