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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:
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).
In 2007, based upon the Survey of Household Spending of 2005, Statistics Canada announced the following weights for the major spending categories tracked by the CPI.
Suppose that quantity demand falls by 30% as a result of a 5% increase in price. What would be the price elasticity of demand for this good?
can u please tell me why lag length criteria is used during estimation of VAR model? what is the purpose of lag length criteria and how it can be interpreted?
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