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

Null and alternative hypothesis, To determine whether high blood pressure a...

To determine whether high blood pressure affected whether a person had a stroke, a sample of 300 people who had had strokes are examined. In the sample, 37% had high blood pressure

Balance of payment, what causes a shift in the balance of payment?

what causes a shift in the balance of payment?

Competitive bidding process, After a competitive bidding process, Firm G wi...

After a competitive bidding process, Firm G wins a contract to collect and dispose of Firm H's hazardous waste for $1,000 per year. Firm G's labor costs are $200 per year, and beca

Economic assesment, can you tell me how this works, i am struggling to writ...

can you tell me how this works, i am struggling to write my report in economics and i would like to know how much does it cost some help

calculate the marginal revenue of demand graph, Gas Guzzler Motors is one ...

Gas Guzzler Motors is one of three major auto producers. It is currently producing 6,000 cars a day, and selling them at a price of $10,000 each. Its marketing department tells it

Firms could produce vista, Would it be more efficient if more firms could p...

Would it be more efficient if more firms could produce Vista? Would Microsoft have spent the money to develop Vista if it didn't hold a patent--that is, if once it developed Vista,

Explain the philips curve, Problem: Describe whether, the given stateme...

Problem: Describe whether, the given statements (a-f) are True, False or Uncertain. Briefly justify our answer. Questions (g) - (h) show all your calculations. No marks will be

What do you meant by investment, Q. What do you meant by Investment? Wh...

Q. What do you meant by Investment? When we use the word investment, we characteristically mean 'gross investment'. Fundamentally, gross investment comprises all finished goods

Differentiate between actual and potential output, Differentiate between Ac...

Differentiate between Actual and Potential output.  Actual output is that level which economy in fact produces. In contrast, potential output is the aggregate capacity output o

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