If the quantity of money(M) is $300 Billion and the velocity of money (V) is 5, GDP or MV equals $1.5 trillion since 5 x $300 billion = $1.5 trillion. Therefore GDP or (Y)= $1.5 trillion.

Where the money supply is increased or decreased the velocity of circulation is influenced by the the price level (P).
If increases in the quantity of money (M) are not accompanied by increases in production, prices rise because too much paper is chasing too few goods (Demand pull or classic inflation). However where increases in the money supply are in response to increases in productivity, in the short run, real wealth increases without acompanying inflation.
However, in the long run, as a result of continuing increases in real wealth and productivity along with increases in the money supply, competition for labor places upward pressure on wages and prices leading to cost push inflation.
A wage, price and income policy as opposed to monetary policy would work to control cost push inflation but it is politically unpopular, therefore moneytary policy used and this is accompanied by recessions. In conclusion, classic inflation ( too many dollars chasing too few goods) can only be controlled by monetary policy.

In spite of the fact that there is more money then ever before, the global economy is slowing. Much of the money is counterfit because it is not backed up by productivity.
Deflation is due to a decline in agregate demand. As demand falls producers are forced to lower prices. If this continues prices will fall to where it is not economical to produce and deflation places downward pressure on resource based economies as well. ( The collapse of oil prices is reeking havoc on the Soviet union). As the global economy rachets downward and inventories get used up, the shortage of goods will no doubt lead to inflation.

This is an international global problem and it will take international cooperation to deal with it.

Cheers.

Marc Abramsky

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