The total supposition of notes seeks to explain the factors that determine the general price level in a country. The theory states that the price level is directly find out by the impart of money. There are two versions of the Quantity Theory of Money: (1) The Transaction show up and (2) The Cash poise Approach. Let us discuss them in detail.
The Transaction Approach:
black cats transaction approach to the Quantity Theory of Money may be explained with the following equation of exchange.
MV = PT
Where, Â M is the total supply of money
V is the speed of circulation of money
P is the general price level
T is the total transactions in physical goods.
This equation is an identity, that is, a relationship that holds by definition. It means, in an economy the total value of all goods sold during all period (PT) must be equal to the total step of money spent during that period (MV). Fisher assumed that (1) at full employment total physical transactions T in an economy will be a constant, and (2) the velocity of circulation remain constant in the short run because it largely depends on the spending habits of the people.
When these two assumptions are made the equality of Exchange becomes the Quantity Theory of Money which shows that there is an exact, comparative relationship between money supply and the price level. In other words, the level of prices in the economy is directly proportional to the quantity of money in circulation. That is, doubling the total supply of money would double the price level.
It may be note that the above Fishers Equation involve simply primary money or currency money. But modern-day economy extensively uses demand deposits or credit money. It was on account of the growing importance of credit money that Fisher later on extended his equation of exchange to include credit money.
Fishers Transaction Approach can explain the causes of hyperinflation that occurs during war or emergency. It can also...If you want to carry a full essay, order it on our website: Orderessay
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