The value of money (2)
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The document discusses the quantity theory of money, which states that the general price level of goods and services is directly proportional to the money supply. It explains Fisher's cash transaction approach, where the value of money depends on the quantity in circulation. The quantity theory of money defines the supply of money as the quantity in circulation (M) multiplied by its velocity (V), and the demand for money as only being for the exchange of goods. It presents Fisher's equation that the price level equals the total money supply (M + M1) divided by the total volume of transactions. The theory makes unrealistic assumptions like full employment and constant velocity and transactions.
The value of money (2)
- 1. The Value of Money
- 2. The quantity theory of money Fisher, I (1911). The purchasing power of money, USA. Fishers Cash transaction approach Value of money depends upon the quantity of money in circulation in quantity in circulation, Price level, in the value of money.
- 3. The quantity theory of money Supply of money: Quantity of money in circulation = M The velocity of its circulation = V Total volume of money in circulation = MV Demand for money: Money is demanded only for the exchange of goods
- 4. The quantity theory of money The cash transaction theory P = (MV+ M1V1)/T The price level = P Quantity of money in circulation = M The velocity of its circulation = V The volume of credit money = M1 The velocity of circulation of M1 = V1 Total volume of goods and trade = T
- 5. The quantity theory of money Quantity of money PriceLevel Quantity of money ValueofMoney
- 6. The quantity theory of money Assumptions of the theory Full employment T and V are constant Constant relation between M and M1 Price level P is a passive factor
- 7. The quantity theory of money Criticism of the theory Unrealistic assumptions Variables in the transaction are not independent. Full employment is not a real phenomenon Rate of interest ignored