2. The quantity theory of money
Fisher, I (1911). “The purchasing power of
money”, USA.
Fisher’s 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
