Quantity theory of money

A mind-map on the quantity theory of money.

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  • Created by: B_R_D
  • Created on: 15-03-14 18:36
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  • 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.
    • 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

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