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

Diseconomies of scale, What are the four managerial factors that lead to di...

What are the four managerial factors that lead to diseconomies of scale

Answer for this only assignment question in (3000 words), Question 3 (44 ma...

Question 3 (44 marks) Please note that this question requires substantial research. A summary from the text book is not sufficient. To score well you will have to consult several a

Adf test, Table Summary of results from the ADF test ...

Table Summary of results from the ADF test Test Number Oil GDP Interest rate Inflation Unemployment Exc

Financing of the external payments deficit, Financing of the external payme...

Financing of the external payments deficit: The trend  in India's widening CAD during the second half of  the eighties, both in absolute terms and also as a proportion of the

What is GDP?, What was Real GDP for 2009? What does GDP tell us? How did ...

What was Real GDP for 2009? What does GDP tell us? How did GDP change from 2008? What caused these changes? What was GNP for 2009? What is the difference between GDP and GNP?

Physiocrats spoke of the natural order, Consider the following: "The physio...

Consider the following: "The physiocrats spoke of the natural order and favored laissez-faire yet strongly supported the absolute authority of the monarchy." Analyze this supposed

International Trade, How can an economy achieve mutual gain from Internatio...

How can an economy achieve mutual gain from International Trade?

Trade cycle, discus the various measures that may be taken by a firm to cou...

discus the various measures that may be taken by a firm to counteract the evil effect of a trade cycle

Explain why interest rates are pro-cyclical, Critically explain why interes...

Critically explain why interest rates are pro-cyclical, using the supply and demand for bonds framework.

Determine the degrees of freedom, A biologist working in the Outback of Aus...

A biologist working in the Outback of Australia is studying the effects of land-use by tourists (campers, fishers, etc.) on vegetation cover in a river gorge of the outback. There

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