News Quantity Theory Of Money
Professor Taussing has defined it inwards the next words:
"Double the quantity of coin in addition to other things remaining the same prices volition live on twice in addition to the value of coin 1 half. Half the quantity of coin prices volition live on 1 one-half in addition to the value of coin double."
The theory also assumes that the quantity of coin is direct related to goods in addition to services offered for sale over a given menstruation of fourth dimension in addition to the furnish of goods in addition to services remains fixed.
Example: Let us suppose that in that place is entirely 1 hundred (100) rupees inwards circulation in addition to in that place are entirely 10 commodities for sale in addition to purchase. All the goods stimulate got the same value. So the cost of each commodity volition live on 100/10 = 10 Rs. Further suppose that the quantity of coin inwards circulation double (200). Now the cost of each volition live on Rs. 20. It agency the cost has doubled exactly the value of coin has reduced to 1/2.
Now farther nosotros assume that nosotros trim back the quantity of coin from 100 to Rupee 50. Now each commodity cost volition live on 50/10 = 5 Rs. So inwards this way, the cost is reduced to 1/2 exactly the value of coin is doubled.
Professor Fisher has introduced the quantity theory inwards the mathematical equation in addition to he has also discussed the velocity of circulation of money.
Formula: P = MV M'V' / T
P = General cost level.
M = Amount of coin inwards circulation.
V = Velocity of circulation.
M' = Credit coin issued past times bank
V' = The velocity of credit circulation.
T = Total amount of goods in addition to services bought in addition to sold.
Let us suppose the furnish of currency inwards circulation ( M ) is Rs. 100 in addition to the velocity is 3 ( V ). The depository fiscal establishment credit ( M' ) inwards circulation. We assume is also 100 Rs. in addition to its velocity is two ( V' ). The full book of transaction is 100.
The equation is = P = MV M'V' / T
P = 100 x 3 100 x 2/100 = Rs. 500/100 = 5 Rs.
Now nosotros double the coin in addition to credit amount in addition to and then cheque the cost level.
P = 200 x 3 200 x 2/100 = Rs. 1000/100 = 10 Rs.
According to it prices has doubled past times doubling the M. So farther if nosotros 1 one-half the M, the prices volition ab also 1/2.
According to Prof. Fisher, in that place are 3 of import factors which influence the value of money.
1. Quantity of money.
2. Transaction velocity of money.
3. Volume of transaction.
Assumptions:
Following are the of import assumptions:
1. Constant Velocity Of Circulation Of Money:
Velocity of circulation agency that 1 unit of measurement of coin how many times passes inwards unlike hands. For event if 5 Rs. greenback passes through 5 persons, it agency the quantity of coin volition live on xx five. According to this theory it has been assumed that velocity of circulation of coin remains constant. There is no modify inwards it.
2. No Change In Credit Money:
It has been also assumed that credit coin ( M' ) inwards circulation volition rest constant.
3. No Changes In The Volume Of Transaction:
It has been assumed that full goods in addition to services quantity remains constant.
4. No Change In Direct Exchange:
There should live on no modify inwards the book of direct exchange.
5. No Change In The Hidden Money:
There should live on no modify inwards the quantity of hidden coin otherwise this theory volition live on non live on applicable.
Criticism on Quantity Theory of Money:
1. Useless Assumptions:
This theory has been assumes that velocity V,V,T remains constant inwards the curt run spell the fact is that inwards existent life they modify inwards the long run every bit good every bit inwards the curt run.
2. Independent Variables:
In this equation it has been assumed that M,V in addition to T are independent variables spell it is non true. When coin changes it brings changes inwards velocity in addition to inwards the amount of goods in addition to services.
3. Proportionate Change:
According to Fisher the increment or decrease inwards the quantity of coin brings proportionate modify inwards the cost level. While the history shows that it is non true.
4. Unemployed Resources Case:
The amount key objection on this theory is that if the nosotros are unemployed resources inwards a dry reason in addition to then an increment inwards the furnish of coin volition live on absorbed inwards the unemployment resources in addition to production volition increase. There volition live on no ascent inwards the prices level.
5. Trade Cycle:
According to this theory Govt. tin increment the quantity of coin to withdraw the deflation in addition to decrease the furnish of coin to command inflation. But inwards 1930 when peachy depression took house every dry reason tried her best to increment the quantity of coin exactly the prices did non ascent in addition to depression could non live on removed.
6. Ignores The Rate Of Interest:
Another serious defect is that this theory does non pick out into consideration the influences of the charge per unit of measurement of involvement on cash balances.
7. Dynamic Treatment:
Another objection is that it does non care for the job dynamically. It has failed to explicate the processes through which the changes inwards the quantity of coin touching on the cost level.
After long give-and-take it seems that this theory is non acceptable exactly it is fact that it enables us inwards agreement the fluctuations inwards the value of money.