Quantity Theory of Money in Macro Economics

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Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short run  fluctuations in national income the business cycle, and the attempt to understand the determinants of long run economics growth increases in national income.

The study of economic systems aggregating over the functioning of individual economic units, it is primarily concerned with variables, which follow systematic and predictable paths of behavior and can be analyzed independently of the decisions of the many agents who determine their level. More specifically, it is a study of national economies and the determination of national income.

Until the early twentieth century, the quantity theory of money dominated as the favored macroeconomic model among as classical economists.  The equation states that the money supply times the velocity of money how quickly cash is passed from one person to another through a series of transactions is equivalent to nominal output (price level times quantity of goods and services produced). Classical economists, such as Fisher assumed that real income and the velocity of money would be static in the short-run, so, based on this theory, a change in price level could only be brought about by a change in money supply.

This equation is the central foundation for the economic school of thought known as Monetarism. The classical quantity theory of money assumed that the demand for money was static and independent of other factors such as mark up rates.Economists questioned the classical quantity theory of money during the great depression when the demand for money, and thus the velocity of money, fell sharply. The money using economy is a good thing. Money is not only a medium of exchange but also a temporary abode of purchasing power. So there was a demand for money. This was mainly influence by national income.

The main cause of inflation is an excess supply of money leading to in the words of Monetarist Economist Milton Friedman, too much money chasing too few goods. We will see graphically how this can lead to a build up of inflationary pressure in an economy. Attempts by the government to use fiscal and monetary policy to "fine-tune" the rate of growth of aggregate demand are often costly and ineffective. Fiscal policy has a role to play in stabilizing the economy providing that the government is successfully able to control its own borrowing.

Feroz Ahmed Bawany goal is to increase my knowledge and to understand the only civilized creations of Almighty Lord are HUMAN. He is a regular contributer to TRCB.com.

 

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