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Quantity Theory Of Money (QTM)

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Part A Quantity theory of money (QTM) is a theory which proposes that the amount of money and the value of products in the market are related. The theory mainly explains that no matter how many times more the stock of money is multiplied, the alterations in prices will be equal to the alterations in supply of money. A good part of empirical studies suggest to think of money as some asset or any other valuable thing. This way it is easier to grasp the picture of money having a value, which is defined by the interchanges of supply and demand for money. Therefore, when supply of money changes, its value also alters. Because it is in human nature that the more money one possesses, the more one spends, as soon as the demand for certain …show more content…

These are good news for savings account owners who now get more from their deposits. This is the largest group of citizens (mostly elderlies) that gained benefits from the interest rate increase. Thirdly, credit cards did not remain unchanged, either. Interest on credit cards is now at its peak since the last 10 years, reaching 23% per annum with fees. It can grow even more if the discount rate also goes up. Next up is investments. There is no doubt that increasing interest rate in most cases results in cost decrease of state and corporate bonds. Purchasing these bonds can bring benefits to those who buy them, but not to the owners of the bonds. Companies also might face difficulties after interest rate increase, especially the ones that pay out large dividends. This is because the value of their shares get reduced, which is, again, quite beneficial for people who buy those shares. Unlike the situation of companies, the shares of financial institutions, which receive a large margin with an increase of interest rate, tend to grow in value. This, however, brings nothing but disadvantage to the commons. Lastly, but equally important, the upward change in interest rate can increase fixed amount of pensions and therefore bring even more dividends to the elderly

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