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# Quantity Theory of Money

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# Quantity Theory of Money

Quantity Theory of Money

Quantity Theory of Money

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### Quantity Theory of Money

1. 1. Quantity Theory of Money BY Roopak chithran Mba @ tkm
2. 2. MONEY?? •Money is something which is freely used and generally accepted as a medium of exchange and/or as a unit of account.
3. 3. •It as something that serves as a medium of exchange, a unit of accounting, and a store of value. •Money serves as a store of value in that it allows us to store the rewards of our labor or business in a convenient tool.
4. 4. •Medium of exchange •Measure of value •Store of value
5. 5. • its individual units must be capable of mutual substitution (i.e., interchangeability). • Durability: able to withstand repeated use. • Portability: easily carried and transported. • its value must be easily identified. • Stability of value: its value should not fluctuate.
6. 6. FUNCTIONS OF MONEY. Money is a matter of function four functions : • Money is a standard of deferred payments • Money is a medium of exchange • Money is a measure of value • Money is a store of value.
7. 7. 1. Medium of Exchange: • This is the central function of money. For performing this function, money should have general acceptability. Money as a medium of exchange divides the exchange transactions into two parts, namely, sale and purchase. This function of money facilitates sale and purchase, independent of each other.
8. 8. 2.Measure of value or Unit of value: • Money serve as a unit of account. As Crother puts it, "Money acts as a standard measures of value to which all other things can be compared." Money measures the value of economic goods. Money works as a common denominator into which the values of all goods and services are expressed. When we express the value of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.
9. 9. 3.Standard of Deferred Payments: • Credit has become the life and blood of a modern capitalist economy. In millions of transactions, instant payments are not made. The debtors make a promise that they will make payment on some future date. In those situations money acts as a standard of deferred payments. It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
10. 10. 4. Store of Value: • Wealth can be conveniently stored in the form of money. Money can be stored without loss in value. Saving are secured and can be used whenever there is a need. In this way, money acts as a bridge between the present and the future. Money means Goods and services. Thus, money serves as a store of value.
11. 11. Quantity Theory Of Money (QTM)
12. 12. • In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. • The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics.
13. 13. • While mainstream economists agree that the quantity theory holds true in the long run • Critics of the theory argue that the direct relationship between money supply and price level does not hold.
14. 14. Fisher’s equation of exchange • Irving Fisher, who was one of the well-known economists of the early 1900's, came up with the “Equation of Exchange” concept. ... That equation was MV=PT to explain the key relationships as to how these variables interact with each other and the economy. M is the money supply. V is the velocity of money.
15. 15. Fisher’s equation of exchange • In its modern form, the quantity theory builds upon the following definitional relationship. MV = PT (the Fisher Equation) Each variable denotes the following: M = Money Supply V = Velocity of Circulation (the number of times money changes hands) P = Average Price Level T = Volume of Transactions of Goods and Services
16. 16. Thankyou for listening 