You may have noticed things are getting a little pricier. How’d we get here?
The most basic equation in monetary economics is MV = PY. The money supply (M) times the velocity of money (V) equals the price level (P) times real GDP (Y). It’s based on accounting identities and is always true mathematically. Let’s look at each part in context of the pandemic and see what’s going on.
The Federal Reserve learns of the pandemic. The only variable in the equation that the Fed directly controls is M, the money supply. The Fed increases it to counteract the impending economic doom.
Something to Consider
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