Quantity theory of money Flashcards
(9 cards)
1
Q
Define quantity theory of money
A
Links growth rates in money supply with growth rates in prices (inflation).
2
Q
Who believes this? What do they back this belief with?
A
*Monetrists
* the fishers equation.
3
Q
What are the different variables in the fishers equation/
A
- the money supply (M)
- velocity of circulation - the amount of times money is changing hands in a year
- Average price level
- Quantity of of goods/ services sold - Real GDP.
4
Q
What is the fishers equation?
A
MV=PQ
5
Q
What does ‘MV’ represent?
A
- what is bought/ consumed (nominal GDP)
- the total money circulated in the economy x number of transactions with that money
6
Q
What is ‘PQ’?
A
- Value of what is sold
- the amount of goods sold x current prices (nominal GDP)
7
Q
What do monetarists say about variables that influence prices? How?
A
- It’s not three variable, only 1 (the money supply) as V and Q are constant.
- V cannot change enough to the point of influencing prices, and Q is relatively constant over time.
8
Q
Who contests that variables are fixed?
A
Keynesian - they say in a recession v can decrease significantly during a recession and increases in money supply don’t impact price as much during a recession.
9
Q
A
