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

Money Supply….What is the money supply….?