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1. The Value of Money

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