of Money Quantity theories of money explain the relationship between quantity of money and value of money. Here, we are given two approaches of Quantity Theory of Money, viz. Fisher’s Transaction Approach and Cambridge Cash Balance Approach. (a) Fisher’s Quantity Theory of Money: The quantity theory of money is a very old theory.
It was first propounded in by an Italian economist, Davanzatti. But, the credit for popularizing this theory in recent years rightly belongs to the well-known American economist, Irving Fisher who published his book, ‘The Purchasing Power of Money” in .He gave it a quantitative form in terms of his famous “Equation of Exchange”. The general form of equation given by Fisher is Where M = Money Supply/quantity of Money V = Velocity of Money P = Price level T = Volume of Transaction. Irving Fisher MV = PT Fisher points out that in a country during any given period of time, the total quantity of money (MV) will be equal to the total value of all goods and services bought and sold (PT).
MV = PT This equation is referred to as “Cash Transaction Equation”. It is expressed as P = MV / T which implies that the quantity of money determines the price level and the price level in its turn varies directly with the quantity of money, provided ‘V’ and ‘T’ remain constant. The above equation considers only currency money. But, in a modern economy, bank’s demand deposits or credit money and its velocity play a vital part in business.
Therefore, Fisher extended his original equation of exchange to include bank deposits M1 and its velocity V1. The revised equation was: From the revised equation, it is evident, that the price level is determined by (a) the quantity of money in circulation ‘M’ (b) the velocity of circulation of money ‘V’ (c) the volume of bank credit money M (d) the velocity of circulation of credit money V and the volume of trade (T) Supply of Money = Demand for Money PT = MV + M V P = MV