(Challenging)Let DX Denote a Small Change in the Variable X

question 194

Essay

(Challenging)Let DX denote a small change in the variable X.Starting from the quantity equation MV = PY,show that the following relation between percentage changes holds: DM/M + DV/V = DP/P + DY/Y.(Note: It should be emphasized that this relationship holds for small changes,say less than 5 percent.The larger the changes,the less precise are the results derived from this relationship.)

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Definitions:

Demand Curve

A graphical representation in economics showing the relationship between the price of a specific good and the amount of it that consumers are willing and able to purchase at various prices.

Supply Curve

The supply curve graphically represents the relationship between the price of a good and the quantity supplied by producers over a specific time period.

Market

A system or place where parties engage in exchange of goods, services, or information, characterized by supply and demand.

Positive Externality

A benefit that is enjoyed by a third-party as a result of an economic transaction in which they had no direct involvement.