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Fisher's Equation of Exchange

Fisher's Equation of Exchange states that the total money supply equals the total value of goods and services in an economy. The money supply is calculated as the quantity of money in circulation multiplied by its velocity. Demand for money comes only from transactions of goods and services, where total transactions equal the price level multiplied by the total output. The theory assumes that as the money supply increases, the price level will also increase if the velocity of money and total output remain constant. However, the theory makes unrealistic assumptions and fails to fully explain the relationship between money supply, velocity, output, and price level changes over time.

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3K views17 pages

Fisher's Equation of Exchange

Fisher's Equation of Exchange states that the total money supply equals the total value of goods and services in an economy. The money supply is calculated as the quantity of money in circulation multiplied by its velocity. Demand for money comes only from transactions of goods and services, where total transactions equal the price level multiplied by the total output. The theory assumes that as the money supply increases, the price level will also increase if the velocity of money and total output remain constant. However, the theory makes unrealistic assumptions and fails to fully explain the relationship between money supply, velocity, output, and price level changes over time.

Uploaded by

Akshay Akki
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Fishers Equation of Exchange the total volume of money in a country, is equal to the total value of all goods and

services. The total Supply of money is obtained by = Quantity of money in circulation (M) X Velocity in circulation (V) or M x V=Total supply of money

The velocity of circulation means the average no. of times a unit money change hands among spenders during a given period of time.

Demand for money: money in an economy is only for transaction. The total goods and services bought and sold during a period is obtained by = volume of goods and services transacted or total amount of output (T) with the average price of these goods and services (P). Or total transaction of goods and services= P x T

Because: total supply of money=total demand of money So: MV=PT or P=MV/T from the above relationship, it clear that general level of prices varies directly with the quantity of money and velocity of money. And inversely with the volume of transaction.

Further, greater the quantity of transaction (T), to be purchased with a given flow of money (MV), lower will be price level general. And vice-versa.

Assumptions of theory 1. the volume of circulating money M. There is no hording of money.


2.the price level of inactive. it does not change by itself. 3. the theory assume that T and V remain constant.

1. Unrealistic assumption: fisher theory based on that V& T are independent variables. And not affected by the changes in the quantity of money (M) In not proper. 2. Price level is active factor: the theory is assume that price level is passive factor.

Process of price changed not explained: it fails to explain how the price level changes in the quantity of money.

Time lags: there is always a time lags between the change in money supply and its effect on price level. It is not slow and gradual process. It is possible that other things may not remain same by that time.

Cambridge approach as per this theory, the demand for money not only for transaction only, but also for the purpose of value of store (precautionary motive). Fisher theory was based on flow concept. But Cambridge approach considers money a stock concept.

Cash transaction approach, money is expected to circulate. In cahsh approach, money velocity is discarded. Here. Money is kept as idle balance to have command over future goods.

Marshall Equation M=KY M= total quantity of money at a point of time K= proportion of income which people want to hold in form of money. Y= Level of national income

PIGOU Equation: P=KR/M M= total quantity of money at a time R= total real income K= proportion of real income, which the community desire to hold. Pigou equation shows that the value of money (P) changes inversely in response to change in the supply of money (M).

Robertson Equation

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