The first version of the Quantity theory is known as the Fisher Equation, named after the economist who developed it. The equation is:.
MV = PT.
Where M is the money supply, V is the velocity of circulation, P is a measure of the price level, and T is the number of transactions. This version of the Quantity theory assumes that the government can control the money supply by its monetary policy. The velocity of circulation measures the speed at which money changes hands, so if people spend their money more quickly, velocity will rise. Quantity theorists assume that velocity is stable, so it is unlikely to change quickly. On the left side of the equation, M is multiplied by V, showing the amount spent in the economy.
On the right of the equation, P is multiplied by T, showing the amount which is received. Quantity theorists assume that the economy is at full employment, so only P is likely to vary. If the money supply rises, MV must also rise, and this leads to an identical rise in PT. As T is assumed to be at the full employment level, the rise in the money supply must lead to inflation.
The Cambridge version of the Quantity theory uses the following equation:.
MD = kPY.
Where MD is the demand for money, k is the proportion of income held in cash balances, P is the price level, and Y is real income. The demand for money refers to the desire that consumers have to hold some of their wealth in a liquid form, so it is sometimes known as a liquidity preference. Monetarists assume that people hold cash to finance transactions, so that a rise in the price level or a rise in real income will increase the demand for money. Monetarists assume that people tend to hold a fairly steady proportion of their income in cash, so k will tend to be quite stable.
In the Cambridge version, a rise in the money supply leads to changes in the economy because disequilibrium is created, as the supply of money now exceeds the demand for money.
"Inflation that is higher than expected benefits debtors. Inflation that is lower than expected benefits creditors."... Inflation was first noticed after the adoption of capitalism. ... The law of demand dictates this cause of inflation. ... While it is true that actual inflation normally does not stray far from anticipated inflation, an unanticipated inflation causes a loss to creditors that can"t be avoided. ...
These are inflation, deflation, hyperinflation and stagflation. Inflation can be a good thing or a bad thing, in a good economy with low employment it is good to have inflation, but when there is bad unemployment inflation is a bad thing because people do not have or earn enough money to keep up with changing prices. ... When there is inflation the value of a dollar never stays constant. ... Inflation in effect wipes out your purchasing power. ... Stagflation ("The Simultaneous occurrence of substantial unemployment and inflation")(Schiller p.327) In theory inflation and unemployment move in o...
Inflation is defined as a sustained rise in the general price level. When the inflation figures' come out once a month and are quoted on the news, the newsreaders give certain percentage rates of inflation'. ... This is much harder when inflation is high. High inflation tends to coincide with variable inflation and, therefore, very unstable prices. Unanticipated inflation causes uncertainty. ...
What is inflation? ... Hence, inflation is not easy to define in practice. This should be kept in mind when discussing how to defeat inflation. ... Some say that inflation is not only expected, but also often, needed. ... There are even examples of inflation declining while the economy booms. ...
The answer is inflation. ... When this happens we may get demand-pull inflation or cost-push inflation. ... There are four other types of inflation that I will talk about and those are anticipated inflation, unanticipated inflation, stagflation, and hyperinflation. When we are expecting inflation to occur, we have anticipated inflation. ... The next type of inflation is unanticipated inflation. ...
Inflation can be divided into cost-push inflation and demand-pull inflation. Cost-push inflation is defined as "inflation whose initial cause is a rise in production costs". ... Inflation expectations can also cause inflation. ... Not every one suffers from the inflation. ... Today the market interest rates reflect inflation and inflation expectations. ...
Generally, a moderate rate of inflation has been the ultimate goal. ... So too does the belief that inflation originates in the labor market. ... Are there real long-term benefits to low, or zero, inflation? What are the real effects of low inflation? ... This implies that in the short-run, nominal wage rise will not fully absorb the actual inflation, and as such, there is scope for reducing unemployment through inflation. ...
Inflation Over the last century many countries throughout the world have experienced inflation as their major economic problem. Expensive wars have traditionally been recognized as the sources of inflation. ... World War II brought the persistent inflation that economists came to expect. ... There are two opposite theories regarding inflation. Monetarism indicates that inflation is due to increases in the supply of money. ...
