fisher quantity theory of money, introductory macroeconomics DU , Delhi university, economics hons.

fisher quantity theory of money, introductory macroeconomics, Delhi university, economics hons. Website www.vishnueconomicsschool.in    / channel   Link of Separate Channel Link For UPSC ECONOMICS Download my app Vishnu ECONOMICS SCHOOL from the playlist or the link is given below https://play.google.com/store/apps/de... TELEGRAM; - https://t.me/Vishnueconomicsschool FACEBOOK PAGE https://www.facebook.com/Vishnu-Econo... INSTAGRAM   / vishnuecoschool   Our channel for commerce students VE Academy of Commerce    / @vishnueconomicsschoolenglish   DEMO ENGLISH MEDIUM    • MICROECONOMICS   HINDI MEDIUM    • Playlist   consumer surplus economics Fisher's Quantity theory of money The quantity theory of money is the oldest theory of determining the value of money. this theory was described in detail by economists like Irving Fisher in his book the purchasing power of money 1981. The Quantity Theory of Money states that there is a direct and proportionate relationship between the quantity of money and the general price level and an inverse proportionate relation between the quantity of money and the value of money. Assumptions Demand for money remains constant Trade and business activity remain constant. The supply of credit money remains the same The velocity of money does not change know Hoarding of money Full employment. The Fisher Equation or quantity equation MV=PT M=Money Supply V=Velocity of circulation (the number of times money changes hands) P =Average Price Level T=Volume of transactions of goods and services MV=PT P=\ \frac{MV}{T} Since the velocity of money and transaction are constant any change in money supply will bring a proportional change in the price level. From transition to income The number of transactions T is replaced by the total output of the economy Y because transactions are difficult to measure. Transactions and output are related (not the same) because the more the economy produces, the more goods are bought and sold. If Y denotes the amount of output and P denotes the price of one unit of output, then the value of output is PY. Money x Velocity = Price x Output M Х V = P Х Y. On the assumption that both V and Y are fixed, quantity of money determines the price level. Any rise in the quantity of money will bring a proportionate rise in price level and vice versa. If Y is not fixed and only V is fixed, then the money supply determines the nominal value of output (PY). In other words, the quantity of money determines nominal GDP. Any increase in the quantity of money (M) will lead to a proportional increase in nominal GDP (or PY) and vice versa. Cambridge cash balance approach of the quantity theory of money (the money demand function and quantity equation) The money demand function is {\sfrac{M}{P}}^d=\ kY\ M/P is called real money balances. it is often useful to express the quantity of money in terms of the number of goods and services it can buy. k is a constant it is the proportion of income that people want to hold in cash. Y is real income. The equation state that the quantity of real money balance is proportional to Income. Higher-income implies greater demand for real money balance and vice versa {\sfrac{M}{P}}^d=\ kY\ M(\sfrac{1}{K})\ =\ PY \sfrac{1}{K}\ =\ V MV=PY The proportion of income held in cash is large (k) velocity of money (money changes in hand frequently) will be less. demand parameter (k) and velocity of money (M) are opposite sides of the same coin. Velocity is the ratio of GDP and quantity of money. V=\ \frac{PY}{M} To know the effect of the quantity of money on the GDP velocity of money is assumed to be constant. PY=\ M\bar{V} where the bar over V means velocity is fixed. therefore, a change in the quantity of money must cause a Proportional change in Nominal GDP (PY).