Define the fisher equation, Macroeconomics

Assignment Help:

Define the Fisher equation

Fisher equation is:

Money supply (stock of money) x velocity of circulation of money = price level x total transactions in the economy or     MV = PT

In Fisher equation, for a specific time period say a year, the stock of money in economy (or money supply) shown by the symbol (M) multiplied by velocity of circulation of money (the number of times money changes hands) or (V) equals the price level (P) multiplied by total number of transactions (T). A transaction takes place when a service or good bought. T measures all purchases of services and goods in the economy.

To convert the equation of exchange (MV = PT) - which is true by definition - into a theory of inflation it is essential to make three assumptions. The first two are:

  • Velocity of speed or circulation at which money is spent and total transactions (which are determined by level of real national output in economy) are fixed or at least stable.
  • In the quantity theory money is a medium of exchange (or means of payment) however not a store of value. This means that people quickly spend any money they receive.

Supposing the government allows the money supply to expand faster than the rate at which real national output increases. Consequently households and firms possess money balances (or stocks of money) which are greater than those they wish to hold. According to quantity theory these excess money balances will quickly be spent. This brings us to third assumption in the quantity theory: changes in the money supply are presumed to bring about changes in price level (rather than vice versa).

 


Related Discussions:- Define the fisher equation

Elasticity with respect to the price of gasoline, Suppose the annual demand...

Suppose the annual demand function for the Honda Accord is Qd = 430 - 10 PA + 10 PC - 10 PG where PA and PC are the prices of the Accord and the Toyota Camry respectively (in thous

Does war benefit or harm located middle east, Some countries that supply oi...

Some countries that supply oil to petrol manufacturers are located in or near the Middle East, others are not located in or near the Middle East. (i) Does the war benefit or har

Consumer Price Index, What is the formula for consumer price index?

What is the formula for consumer price index?

Effects in addition to the direct effect on dairy prices, Subsidy programs ...

Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on dairy prices. What impact do you suppose farm subsidies are likely to have on

Economic concepts models- demand/supply concepts, Questions: ...

Questions: Search through newspapers for ONE article that is relevant to the economics concepts. You are also required to attach the article to your final report

What do you mean by exchange rate, Q. What do you mean by Exchange rate? ...

Q. What do you mean by Exchange rate? Exchange rate is defined as the price of one unit of currency in terms of another currency. If one euro costs 1.5 USD then 1 USD costs 1/1

Illustrate budget constraint and optimal bundle, Danny is an investment ban...

Danny is an investment banker and has income I = 300. When prices are px = 10 and py = 20, Danny consumes the bundle (x; y) = (6; 12). 1. Illustrate Danny's budget constraint

Trade and development, TRADE AND DEVELOPMENT: In the earlier Units of ...

TRADE AND DEVELOPMENT: In the earlier Units of this block, you have learnt about the trade policy from historical perspective and the recent shift in policy during nineties. Y

Uncontrollable environmental variables, Consider an international firm you ...

Consider an international firm you are familiar with and what the firm needs to be concerned with when entering a foreign market. Specifically, in terms of the chapters you covered

Subsequent withdrawals increase, What is the amount of five equal annual de...

What is the amount of five equal annual deposits that can provide five annual withdrawals, where a first withdrawal of $1500 is made at the end of year six and subsequent withdrawa

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd