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a) Use the quantity theory of money to explain the classical dichotomy and monetary neutrality [2 marks] b) In what sense is inflation like a tax? Thus, the supply of money or the total expenditure on national income is MV. But, in reality, full employment of resources is a rare possibility. Though the theory was first stated in 1586, it received its full-fledged popularity at the hands of Irving Fisher in 1911. But at a very low interest rate, the speculative demand for money becomes perfectly elastic. Obviously, larger the incomes of the individual, greater is the demand for cash or money balances.where Y is the physical level of aggregate or national output, P is the average price and k is the proportion of national output or income that people want to hold. One of the primary research areas for this branch of economics is the quantity theory of money. The velocity of money is a measurement of the rate at which consumers and businesses exchange money in an economy. 1 crore then V = 5. 1. By using Investopedia, you accept our In the classical system, the main function of money is to act as a medium of exchange.It is to determine the general level of prices at which goods and services will be exchanged. Keynes believed in the existence of unemployment equilibrium in the economy.The existence of unemployment equilibrium implies that an increase in money supply can bring about permanent increases in the level of output. This theory was described comprehensively by Irving Fisher (1911), in the book The Purchasing Power of Money.It is the classical view of how money is used in the economy, and what variables it affects.
Before publishing your Articles on this site, please read the following pages: dichotomy and monetary neutrality [2 marks]b) In what sense is inflation like a tax? What we find in reality is unemployment or underemployment of resources. So they spend money. Algebraically, MV=PT where M, V, P, and T are the supply of money, velocity of money, price level and the volume of transactions (or real total output). Panel A of the figure shows that as the quantity of money increases from O to M, the level of output also rises along the OT portion of the OTC curve. LAccording to Keynes, it is expectations about changes in bond prices or in the market rate of interest that determine the speculative demand for money, Ls = f(r). Instead of governments continually adjusting economic policies through government spending and taxation levels, monetarists recommend letting non-inflationary policies–like a gradual reduction of the money supply–lead an economy to This implies that there will not be any effect on investment and income. It is supported and calculated by using the Fisher Equation on Quantity Theory of Money. Given the marginal efficiency of capital, a fall in the rate of interest will increase the volume of investment.The increased investment will raise effective demand through the multiplier effect thereby increasing income, output and employment. It is determined by the demand for and supply of money. Before the attainment of full employment state (YBy utilising its resources efficiently and fully, an economy can increase its output level by increasing the volume of investment consequent upon an increase in money supply. The Classical economists, David Ricardo, Karl Marx and, to a lesser degree, John Stuart Mill disagreed with both the "pure" Quantity Theory of Hume and the real bills doctrine of Smith.They possessed what is known as a "commodity theory" or "metallic theory" of money. Here, by cash balance and money balance we mean the amount of money that people want to hold rather than savings.According to Cambridge economists, people wish to hold cash to finance transactions and for security against unforeseen needs. This means that a unit of money is spent 5 times in buying goods and services in the economy. This diagram is interesting in the sense that it first establishes the relationship between money supply and national output or national income below the full employment stage (YNow the relationship between money supply and price level after the full employment stage can be established assuming O’ as the origin. During underemployment an increase in money supply will tend to raise output level and, hence, T, but not P. So, quantity theory of money breaks down when resources remain at full employment.Secondly, in a dynamic economy V, V’, T, the ratio of M to M’ never remain constant. The "equation of exchange" relating the supply of money to the value of money transactions was stated by John Stuart Mill who expanded on the ideas of David Hume. Thus, so long as there is unemployment, output will change in the same proportion as the quantity of money, and there will be no change in prices; and when there is full employment, prices will change in the same proportion as the quantity of money.Therefore, Keynes stresses the point that with increase in the quantity of money, prices rise only when the level of full employment is reached, and not before this.This is illustrated in Fig. This Friedmanian words are enough to establish the essence of quantity theory of money inflation is largely caused by the excessive growth of money supply and by nothing else.Welcome to EconomicsDiscussion.net!
a) Use the quantity theory of money to explain the classical dichotomy and monetary neutrality [2 marks] b) In what sense is inflation like a tax? Thus, the supply of money or the total expenditure on national income is MV. But, in reality, full employment of resources is a rare possibility. Though the theory was first stated in 1586, it received its full-fledged popularity at the hands of Irving Fisher in 1911. But at a very low interest rate, the speculative demand for money becomes perfectly elastic. Obviously, larger the incomes of the individual, greater is the demand for cash or money balances.where Y is the physical level of aggregate or national output, P is the average price and k is the proportion of national output or income that people want to hold. One of the primary research areas for this branch of economics is the quantity theory of money. The velocity of money is a measurement of the rate at which consumers and businesses exchange money in an economy. 1 crore then V = 5. 1. By using Investopedia, you accept our In the classical system, the main function of money is to act as a medium of exchange.It is to determine the general level of prices at which goods and services will be exchanged. Keynes believed in the existence of unemployment equilibrium in the economy.The existence of unemployment equilibrium implies that an increase in money supply can bring about permanent increases in the level of output. This theory was described comprehensively by Irving Fisher (1911), in the book The Purchasing Power of Money.It is the classical view of how money is used in the economy, and what variables it affects.
Before publishing your Articles on this site, please read the following pages: dichotomy and monetary neutrality [2 marks]b) In what sense is inflation like a tax? What we find in reality is unemployment or underemployment of resources. So they spend money. Algebraically, MV=PT where M, V, P, and T are the supply of money, velocity of money, price level and the volume of transactions (or real total output). Panel A of the figure shows that as the quantity of money increases from O to M, the level of output also rises along the OT portion of the OTC curve. LAccording to Keynes, it is expectations about changes in bond prices or in the market rate of interest that determine the speculative demand for money, Ls = f(r). Instead of governments continually adjusting economic policies through government spending and taxation levels, monetarists recommend letting non-inflationary policies–like a gradual reduction of the money supply–lead an economy to This implies that there will not be any effect on investment and income. It is supported and calculated by using the Fisher Equation on Quantity Theory of Money. Given the marginal efficiency of capital, a fall in the rate of interest will increase the volume of investment.The increased investment will raise effective demand through the multiplier effect thereby increasing income, output and employment. It is determined by the demand for and supply of money. Before the attainment of full employment state (YBy utilising its resources efficiently and fully, an economy can increase its output level by increasing the volume of investment consequent upon an increase in money supply. The Classical economists, David Ricardo, Karl Marx and, to a lesser degree, John Stuart Mill disagreed with both the "pure" Quantity Theory of Hume and the real bills doctrine of Smith.They possessed what is known as a "commodity theory" or "metallic theory" of money. Here, by cash balance and money balance we mean the amount of money that people want to hold rather than savings.According to Cambridge economists, people wish to hold cash to finance transactions and for security against unforeseen needs. This means that a unit of money is spent 5 times in buying goods and services in the economy. This diagram is interesting in the sense that it first establishes the relationship between money supply and national output or national income below the full employment stage (YNow the relationship between money supply and price level after the full employment stage can be established assuming O’ as the origin. During underemployment an increase in money supply will tend to raise output level and, hence, T, but not P. So, quantity theory of money breaks down when resources remain at full employment.Secondly, in a dynamic economy V, V’, T, the ratio of M to M’ never remain constant. The "equation of exchange" relating the supply of money to the value of money transactions was stated by John Stuart Mill who expanded on the ideas of David Hume. Thus, so long as there is unemployment, output will change in the same proportion as the quantity of money, and there will be no change in prices; and when there is full employment, prices will change in the same proportion as the quantity of money.Therefore, Keynes stresses the point that with increase in the quantity of money, prices rise only when the level of full employment is reached, and not before this.This is illustrated in Fig. This Friedmanian words are enough to establish the essence of quantity theory of money inflation is largely caused by the excessive growth of money supply and by nothing else.Welcome to EconomicsDiscussion.net!