# Fishers quantity theory of money pp

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### Fishers quantity Theory of Money or The Transaction Approach :

Fishers quantity Theory of Money or The Transaction Approach A.MEENAIAH M.A, M.Phil Lecturer in Economics N.G. College Nalgonda

### Fishers quantity Theory of Money or The Transaction Approach :

Fishers quantity Theory of Money or The Transaction Approach The transactions version of the quantity theory of money was presented by Irving Fisher in his famous book The Purchasing Power of Money (1911), in the form of an Equation of Exchange. MV = PT Prof. Fisher's above version of the quantity theory of money is based on an essential function of money, namely, that money is a medium of exchange. Money is not needed for its own sake, but to exchange it for goods and services. The purchasing power of money depends upon the quantity of money relatively to the amount of goods and services to be purchased

### Equation of Exchange ,MV = PT :

Equation of Exchange ,MV = PT M = The total quantity of money in circulation. V =The velocity of circulation of money. P =The general price-level. T= The total volume of transactions. MV or the product of M and V gives the aggregate effective supply of money (or, total money expenditure) during a given period of time. MV represents total supply of money in the economy. The supply of money over a period of time is the total quantity of money multiplied by the velocity of its circulation. It is indicated by MV.

### PT or the product of P and T, represents the money value of all goods and services bought during a given period of time. It indicates the total demand for money. The demand for money is essentially the demand for transactions purposes. Money, according to Fisher, is demanded not for its own sake, but for the sake of goods and services that it helps to buy. The demand for money is equal to the total value of all goods and services transacted during a given period of time. The total quantity of money (i.e. MV) will be equal to the total value of all goods and services bought and sold (i.e. PT). :

PT or the product of P and T, represents the money value of all goods and services bought during a given period of time. It indicates the total demand for money. The demand for money is essentially the demand for transactions purposes. Money, according to Fisher, is demanded not for its own sake, but for the sake of goods and services that it helps to buy. The demand for money is equal to the total value of all goods and services transacted during a given period of time. The total quantity of money (i.e. MV) will be equal to the total value of all goods and services bought and sold (i.e. PT).

### P = MV T :

P = MV T This equation implies that the quantity of money determines the price-level; the price-level, in its turn, varies directly with the quantity of money (provided V and T remain constant). In the above equation of exchange only primary money or currency money has been included.

### MV + M' V' = PT :

MV + M' V' = PT M' =Deposits in the banks (or, credit money). V'. =The velocity of circulation of credit money. Thus, the external form of equation of exchange was presented by Fisher as follows: MV + M' V' = PT or P = MV + M' V' T

### Determination of Price Level :

Determination of Price Level From the equation, it is evident that the price-level is determined by the following factors: (i) the quantity of money in circulation (M), (ii) velocity of circulation of money (v), (iii) the volume of bank or credit money (M') , (iv) the velocity of circulation of bank money (V'), (v) the volume of Trade (T). The equation of exchange further shows that the price-level (P) is directly related to M, V, M' and V'. It is however, inversely related to T.