ipl-logo

Quantity Theory Of Money: Case Study

981 Words4 Pages

The Quantity theory of money states the direct relationship which exists between money supply and prices in the economy. It says that as money supply in the economy changes, price changes in the same direction too. That is if money supply increases, consumers will have more money in hand to spend, thereby demanding the more goods and services which shifts the demand curve to the left, keeping supply constant leading to a rise in the price level. In similar context when money supply falls, the price level decreases too.
The Quantity theory of money is represented by the following equation:
MV = PT
M = Money supply V = Velocity of Circulation P = Price Levels T = Transactions
T represents the total no. of transactions during a period …show more content…

V in this version of the quantity equations is called the income velocity of money. M/P is called the real money balances. The money demand function is an equation that shows what determines the quantity of real money balances people wish to hold. This equation states that the quantity of real money balances demanded is proportional to real income.
(M/P)^d = ky
A 6 year case study of Romania’s economy has proven with over 95% accuracy that an increase in M (money supply) resulted in inflation – a persistent increase in the price levels at assumed values. (1) This reinforces the QTM is valid and is some empirical evidence supporting the QTM. In the early 1980s there was strict money supply controls in the UK attempting a quick fix of the level of inflation by the newly appointed conservative government which however backfired as it caused a deep recession. This shows that the QTM is valid more in the Long Term as values become more accurate over a given period of …show more content…

Due to hot money flows, investors are more likely to save their money in British banks if the UK interest rates are higher than other countries as they will seek the benefits of a higher return in payments. However a stronger pound makes UK exports less competitive lowering exports and leading to an increased dependence on imports hence lowering the total value of net exports. This has the effect of decreasing Aggregate Demand in the economy as net exports are also a component.

• There can be a decrease in terms of the economic growth. A Bank of England research paper has estimated that raising interest rates by 1% will reduce the total output by 0.6% over a 2 year period. What this means is that a even a quarter point rise would trim a modest 0.15% from GDP which is equivalent to 6 weeks worth of growth at current rates.(3)

• Previous historic economic events show that UK in the past hasn’t reacted well to a rise in the interest rates. In 1979 there was a 17% rise in the rate of interest when the newly appointed conservative government tried to control inflation. However this backfired as the UK went into recession the following year. (4) A recession in termed to be very alarming for an economy as unemployment rate rises, GDP (Gross Domestic Product) growth slows, and housing price

Show More
Related

  • Robber Barons In The Gilded Age

    203 Words  | 1 Pages

    The charge about the old days of the American economy—the nineteenth century, the “Gilded Age,” the era of the “robber barons”—was that it was always beset by a cycle of boom and bust. Whatever nice runs of expansion and opportunity that did come, they always seemed to be coupled with a pretty cataclysmic depression right around the corner. Boom and bust, boom and bust—this was the necessary pattern of the American economy in its primitive state. In the US, in the modern era, all this was smoothed out.

    Read More

  • How Is The Reaganomics Be Used To Change The Economy

    809 Words  | 4 Pages

    The United States of America is known to be the land of opportunity, and many presidents tried different kind of methods to change the US economy to the better. The Reganomics policy which is a policy by president Regan on how to change the course of the US economy. The Reganomics had good policies that made sense like reducing the growth of government spending which was a good point in order for the government to save its money. Reduce the marginal tax rates on income from both labor and capital which could help them pay less tax, and also reduce regulation which could benefit the people of the US, and also reduce inflation by controlling the growth of the money supply. This is an important fact because the growth of the money supply is very important.

    Read More

  • Jimmy Carter: The Great Depression

    621 Words  | 3 Pages

    Inflation slows down economic growth, and it 's the cruelest to the poor and also to the elderly and others who live on fixed incomes. And fourth, we must contribute to the strength of the world economy” (Doc G) he stated these principle in his State of Union Address in 1978. When Carter left office, the recession expanded with unemployment numbers reaching 7.5 percent, mortgage rates at 15 percent, and interest rates peaking at an all-time high of 20

    Read More

  • Republican Party Blame

    777 Words  | 4 Pages

    What causes a recession is inflation. Inflation is a general increase in prices and the fall in the value of money. Falling confidence in the consumer can be a major cause in leading to a recession. Also, manufacturing orders starting to slow down in the economy, this can lead to less money being produced throughout the economy resulting to a loss of jobs. Since this causes a high unemployment rate many of the people will get on a government welfare program to pay for their family and that is even more money being lost in the economy, making the nation fall into a deeper recession.

    Read More

  • Henry Paulson Great Depression Summary

    438 Words  | 2 Pages

    "Great depression?" they gasped. Consumer confidence plummeted, as did consumer spending (which accounts for a stunning 2/3 of US GDP). Corporations, in a mass panic, swiftly switched into a mode of panicked layoffs and cost cutting. The banks, already spooked, continued to tighten their lending not just to consumers but to corporations and other banks as well. And ditto for the rest of the world.

    Read More

  • Great Recession Research Paper

    711 Words  | 3 Pages

    The Great Recession started for the United States in December of 2007 and lasted until June of 2009. This was the worst recession in U.S. History since World War II. During this time, there was a 6.1 % loss in jobs, due the job shortages about 27 million people we either unemployed or underemployed. This affect the age household many people household income dropped increasing the poverty in America. In economics, a recession is a decline in economic activity affecting Gross Domestic Product or GDP for at least two consecutive quarters causing negative economic growth (Downes and Goodman).

    Read More

  • Full Employment In Canada

    1099 Words  | 5 Pages

    The more people that work and make an income, the more money people are going to spend. The less people there are working, the less people there are making an income, and then they do not have the money to spend freely. When large amounts of people are unemployed, it will hurt the rest of the economy, creating a cyclical problem. As unemployment rates grow, people are not making enough money to buy more than what is necessary, and because of this, companies will suffer from less consumer demand, and lose business. As they lose business, they may have to make cuts of their own, causing the unemployment rate to once again rise, and a cyclical effect to take place (Ryan, 2015).

    Read More

  • The Money By Junot Kake Analysis

    721 Words  | 3 Pages

    Mr. Junot Díaz’s paper titled “The Money” is a paper about the struggles of growing up as a Dominican, or less specifically an immigrant, in America. The paper offers a brief gimps into Mr. Díaz’s life as a young man, it shows his family structure and his neighborhood structure. It shows the type of people he had to deal with growing up and how he handled the way these people acted. The point of the text is to show how Mr. Díaz lived as a young man though one specific life experience.

    Read More

  • DBQ Great Recession

    624 Words  | 3 Pages

    The Great Recession was a period of general economic decline observed by world markets beginning around the end of the first decade of the 21st century. The recession was a result of a financial crisis in 2007 which effected the years to come . The primary source of this problem was that banks were creating too much money. In addition, banks had doubled the amount of money and debt in the economy. Resulting in a financial crisis as the government and banks had failed to constrain the financial system’s creation of private credit and money.

    Read More

  • Henry Hazlitt Economics In One Lesson Analysis

    676 Words  | 3 Pages

    Since the creation of the Federal Reserve, inflation has been a persistent, ongoing problem within the United States (Durden, 2013). Since the Federal Reserve is owned by the banks, it is not surprising that it serves the interests of the bank over the American population, and therefore goes against the idea of a free market and biblical principles (Durden, 2013). The value of money is constantly changing and it subject to manipulation by the Federal Reserve. For example, the Federal Reserve can randomly produce money, and add it to the money system, which devalues the currency already in place, and adds to inflation. This is one reason why the value of the U.S. dollar has fallen by 83 percent since 1970 (Durden, 2013).

    Read More

  • The Importance Of Raising Minimum Wage

    776 Words  | 4 Pages

    There has been several Different ideas to keep inflation

    Read More

  • Coca Cola Demand Curve

    1041 Words  | 5 Pages

    Supply is defined as the quantity a producer will supply at a given price. A supply curve shows the relationship between the price and the quantity supplied. The law of supply says that “ as price of a good increases the quantity supplied increases”. There is a positive relationship between the price and quantity

    Read More

  • Classical And Classical Economics: The 1929 Economic Crisis

    1116 Words  | 5 Pages

    His observation on Great Depression arose from the lack of ability to boost the aggregate demand. During the crisis period, economy could not achieve full employment balance, the supply could not create its own demand. At this point the main argument of Keynesian theory on economic crises is that economical shrinkages are generally arisen from the huge drops in the demand. Aggregate demand refers to sum of all consumptions, investments and public expenditures. In his opinion, state should increase the aggregate demand by applying some fiscal and monetary policies.

    Read More

  • Literature Review Of Inflation

    1055 Words  | 5 Pages

    CHAPTER 2 LITERATURE REVIEW INFLATION (InvestorWords, 2015) stated that inflation is the increase in the general price level of goods and services in economy, normally caused by excess supply of money. Inflation usually measured by the Consumer Price Index (CPI). When the cost of producing goods and services goes up, the purchasing power of dollar will decrease. A customer will not be able to purchase the same goods and services as he/she previously could.

    Read More

  • Roles Of Money In Macroeconomics Essay

    1772 Words  | 8 Pages

    ROLE OF MONEY IN MACROECONOMICS 1. Introduction Money can be seen as the medium of exchange which is acceptable while transaction is being undertaken between two parties. Some of the common forms of money are: - Commodity money: This is when the value of the good represents its value in terms of money like gold or silver. - Fiat money: This is when the value of the good is less than the value it represents - Bank money: It is the accounting credits that can be used by the depositor Money serves a variety of crucial functions in the economy and this is why it has gained an unparalleled influence in the matters of economy at micro as well as macro levels. Some of the features of money that make it so important for any economy are as follows:

    Read More

More about Quantity Theory Of Money: Case Study

Open Document