Quantity theory of money
A mind-map on the quantity theory of money.
- Created by: B_R_D
- Created on: 15-03-14 18:36
View mindmap
- QUANTITY THEORY OF MONEY
- The money supply is sometimes thought to be NEUTRAL; if £100 was actually worth £1, it wouldn't make a difference.
- The QUANTITY THEORY OF MONEY states that all increases in prices are caused by increases in the money supply.
- FISHER EQUATION: MV ? PT
- M = total money in economy
- V = VELOCITY OF CIRCULATION; how many times the money changes hands
- Affected by; the frequency with which workers are paid; the use of money substitutes, such as credit cards.
- P = Average price of a transaction within the economy
- T = Total transactions over a period of time
- KEYNSIANS argue that not all increases in the money supply are necessarily inflationary. For example, an increase in M but decrease in V will not lead to inflated prices.
- All economies experience Demand-side and Supply-side shocks. Governments can either ACCOMODATE the S-s shocks or VALIDATE the D-s shocks by using monetary policy.
- Monetarists are absolutely against the use of ACCOMODATION or VALIDATION. They say that inflation is not caused by S-s or D-s shocks, but by government intervention.
- FISHER EQUATION: MV ? PT
- The way in which an increase in the money supply causes an increase in prices is called the MONETARY TRANSMISSION MECHANISM
- BoE generally uses interest rates to influence the money supply, since other, more direct methods are less effective
Similar Economics resources:
Teacher recommended
Comments
No comments have yet been made