Real variables, such as real GDP and the velocity of money, stay constant. A change in a nominal variable—the money supply—leads to changes in other nominal variables, but real variables do not change.
What is meant by real money supply?
The money supply is all the currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash.
What are the four types of money supply?
These four alternative measures of money supply are labelled M1, M2, M3 and M4. The RBI will collect data and calculate and publish figures of all the four measures.
What is elastic money supply?
The borrower gets a house they couldn’t have paid for with cash and our economy gets output it otherwise wouldn’t have had. Likewise, when people borrow too much the money supply can contract to offset this excess. This is called an elastic money supply because the money supply can expand and contract as we need it to.
What is the difference between real and nominal prices?
Definition: The nominal price of a good is its value in terms of money, such as dollars, French francs, or yen. The relative or real price is its value in terms of some other good, service, or bundle of goods. The term “relative price” is used to make comparisons of different goods at the same moment of time.
How does nominal money supply differ from real money supply?
To simply use the term money supply, you are talking about on point in time. And real versus nominal are meaningless. They would only have meaning or relevance if you were talking about an increase (or decrease) from a specific other point in time.
How is nominal spending carried out in the economy?
The “nominal spending” in this expression is carried out using money. While money consists of many different assets, you can—as a metaphor—think of money as consisting entirely of dollar bills. Nominal spending in the economy would then take the form of these dollar bills going from person to person.
How is the velocity of money related to nominal GDP?
Using the fact that nominal GDP equals real GDP × the price level, we see that velocity of money = price level × real GDP money supply. An equation stating that the supply of money times the velocity of money equals nominal GDP.
What happens when nominal value of money is considered?
Thus, if nominal values are considered, firms will end up eroding their capital by investing their money in projects that offer a rate of return that is below the firm’s cost of capital. To offset this problem, specialists in corporate finance have come up with the concept of real value of money.
