The Quantity Theory of MoneyExplain the causes of Inflation - Part 1
List the 4 functions of Money
Money
Means of
differed
payment
Store of
Value
Means of
Exchange
Measure of
Value
List the 7 qualities of Money
Money
Scarce
Durable
Stable in value
DivisiblePortable
Acceptable
Recognisable
What would happen if money didn’t meet any of these functions
or qualities?
Quantity Theory of Money
MV ≡ QP≡ is called an identity. It means that the equation must always balance. M X V must always equal Q x PM = the Money SupplyV = the velocity of circulationP = the Price LevelQ = the no of goods & services purchased/output
Crude Theory (QTOM)
MV ≡ QPHolds V & Q constant & blamesinflation on an increase in themoney supply as if V & Q are heldconstant & M then P must Discredited as evidence now shows that V & Q are not constant
Sophisticated Theory (QTOM)
MV ≡ QPAll Variable but V is relatively predictable.An increase in M is not the only factor which causes inflation (P to ). So there must be other factors, specifically changes to Q & V.If more goods and services produced then more money needed to pay for them, more money in circulation – moving around then……price level increases