Friday, July 20, 2007

Some Help Teaching the Basics

There was a very good article on money and growth in the July 20, 2007 issue of The Wall Street Journal (subscription required). David Henderson does a good job debunking the all too common belief that growth generates inflation. And most importantly, he uses the basic "equation of exchange" - M * V = P * y. (Some of us learned P * Q, but I won't quibble.)

I found that this equation is one of the most helpful when teaching basic economics. It answers many questions (like the one that is the basis of the article), and helps students understand that money is, after all, a tool of economies. Henderson does a good job showing how growth is not, in itself, inflationary by manipulating the variables in the equation and showing how many people can get the wrong impression. It's worth your time to find and read.

Helpful hint: you may be able to find the entire article if you use your search engine to search the news category for the author.

Please share your thoughts on the article.

Posted by TSchilling at July 20, 2007 11:22 AM

At the Fed Camp, you said that mv was nominal and pq was real. If v and p are constant and I divide both sides by p, do I have real money?

Posted by: mike fladlien at July 27, 2007 4:30 PM

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