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

Current event opportunity, Give an example of a current event opportunity c...

Give an example of a current event opportunity cost that includes graphs

What does macroeconomics mean, The study of the overall aspects and working...

The study of the overall aspects and workings of a national economy is like as income, output, and the interrelationship between diverse economic sectors. It is the study of all as

Progressive income tax, Because the structure of the personal income tax is...

Because the structure of the personal income tax is progressive, a larger share of income is taxed at higher rates as real income increases. Therefore, economic growth automaticall

Principle of opportunity cost applies to your life, Give an example of how ...

Give an example of how the Principle of Opportunity Cost applies to your life. Think of a recent decision you made. It could be a decision as simple as whether to eat out or cook y

Impact will high and variable rates of inflation, What impact will high and...

What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?

Making lease payments that are equivalent to annual payments, A company can...

A company can lease an asset for the next five years by making lease payments that are equivalent to annual payments of $3,000 at year 0, $6,000 at year 1, $7,000 at year 2, $7,000

What is real gross domestic product, What is Real GDP To be able to ma...

What is Real GDP To be able to make reasonable comparisons of GDP over time, we must adjust for inflation. For instance, if prices are doubled over 1 year then GDP would doubl

National income, working of static and dynamic multiplier in consumption fu...

working of static and dynamic multiplier in consumption function

Cost curves, the difference between the AC and the AVC curve

the difference between the AC and the AVC curve

International trade, how can a country maintain equilibrium GDP with foreig...

how can a country maintain equilibrium GDP with foreign trade?

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