Social Sciences and History / Unit 14 SSH 1334 short lesson, about 20 seconds
Lags, Excess Reserves, Velocity: MV = PQ
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The idea
Monetary policy is imprecise: effects arrive after long and variable lags; banks holding excess reserves cannot be forced to lend; and velocity, nominal GDP over the money supply, may shift unpredictably. The quantity equation: money times velocity equals price level times real output.
In practice
Inflation targeting, the ECB's rule; the Fed chooses.
Where people slip
Falling velocity blunts more money.
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