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Evaluate the Monetarist's Explanation?
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Evaluate the Monetarist's Explanation? The quantity theory of money is one of the oldest theories of inflation. The quantity theory of money states that the price level is directly related to the amount of money in the economy. The Fisher equation comes into play here. At its simplest form the quantity theory of money can be described as 'too much money chasing too few goods'. The fisher equation sums this up: MV ? PT This states that the money supply time the number of times money changes hands (the velocity if circulation) equal the price level times the total number of transactions. In order for this equation to be true and valid we have to make three assumptions. These assumptions are the view taken by monetarists. 1. The price level is determined by the money supply. 2. V may be constant because the rate at which money is spent may not change very much over...
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