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ECON 2 Lecture Notes - Lecture 17: Irving Fisher, Classical Economics, Exogeny

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amaranthgrasshopper262

27 Aug 2020

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Irvine Valley College

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Document Summary

Velocity of circulation of money is the rate at which money stock is used to make transactions for final goods and services. This was put forward by irving fisher, in his version of the quantity theory of money. Fisher summarized the quantity theory of money in the following equation: Where: m = nominal stock of money in the economy. V = the transactions velocity of circulation of money. P = the general price level of all transactions. T = the number of transactions that take place during the time period. Both mv and pt measure the total value of transactions during the time period hence are always identical. For example if we suppose that in a given economy the number of transactions (t) = 100 and the average price (p) is 10/=, then pt = 1000/=. If the stock of money is 100/=, then the number of times it changes hands (v) = 10.

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Related Questions

There are many economic models to explain the macro-economies function. Adam Smith started the classic economic thinking with his laissez-faire theory. The classical foundation for the role of money supply in an economy started in the mid-1700s. In classic macroeconomics, money is used for transactions. If there is more money or less money in circulation then it means that the prices are higher or lower. The classic model dominated microeconomics and macroeconomics of 1800 and 1900. In the classic macroeconomic model, the role of money is that it is used for transactions. The classic role of money can be understood through the quantity theory of money. The quantity theory of money states that if there are changes in the price level, then there will be corresponding changes in the money supply. The equation for the quantity theory of money is: M * V = P * Q

In this equation,

M = Nominal money supply

V = Velocity of money

P = Average price level

Q = Quantity of goods and services sold

The average price times quantity of goods and services sold represents the nominal GDP. The velocity of money is the number of times a currency is spent during a year.

Say's Law states that supply creates its own demand. It means that the income that is derived from producing some goods by an individual, allows him to purchase goods produced by some other individual. Since everyone has a need to purchase goods, they will produce some goods to earn income and buy what they want. So, the product markets will always be in equilibrium.

Show an empirical study that tests the relative inflation and growth rates on the nominal exchange rates.