Quantity theory of money:- fishers view ( introduction, assumption, explanation and criticism).

                    Quantity theory of money

This theory gives the basic answer that how price level is determined in an economy and why does the price level of any commodity changes.

There are two approach of this theory:-

  1.classical approach.

  2.keynesian approach.

#. Classical approach:-

In classical approach there are two theory 

    (a). Fishers view.

     (b). Cambridge view.

Fishers view of quantity theory of money(transaction approach):-

Irving fisher was the first person who determined the price level and the value of money in an economy.in his theory the basic focus was given on transaction.therefore it is also known as cash transactions approach of quantity theory.

According to prof. Fisher the price level and value of money in an economy is determined by the demand for money and supply of money.

#. Assumption:-

1. There is always full employment in the economy.

2. In short run the velocity of circulation of money is constant.

3. The value of money is determined in long run.

4.money is used only for transaction.

5.in short run total transactions is constant.

6. Price level is condcons and passive factor.

7.the demand for money is proportional to the nature of transportation.

#.demand for money:-

According to classical economist like fisher stated that money is demand only for transaction purpose.

Hence, demand for money is equal to product of price level into amount of transaction.

       Demand for money= product of price and transaction (p.v)

#.supply of money:-

supply of money is the total amount of money present in an economy at particular time.

so, when the quantity of money multiplied by the velocity of circulation then the supply of money is obtained.

Supply of money=product quantity of money and velocity of circulation (m.v)

#. Determination of price level and value of money:-

According to fisher the price level is obtained at that point where demand of money is equal to supply money.

That is, 

                P.t = M.v

    

             P= M.v/t  (this is also known as fisher equation).

As, assumed above T and V both are constant.

So, p is proportional to M.

That is price level is directly proportional to quantity of money.

#. Explanation through diagram:-

In the upper part of diagram quantity of money and price level is taken which is directly proportional to each other.

In the above diagram we can see that when the quantity of money is OQ the price level is OP. But when the quantity of money became OQ1 then the price level also increases and it became Op1.

In the lower part of diagram quantity of money and value of money are taken.

Here both quantity of money and value of money both are inversely related to each other.

So, from the diagram we can clearly state the releationship between quantity of money with its price level and value of money.

#. Criticism of fisher view:-

1. According to fisher the velocity of money and transaction is constant in short run. But as we know that quantity of money changes then boyh velocity of money and transaction changes.

2. The assumption of full employment is unrealistic.

3. It is assumed that price level is passive factor. But according to Keynes price level is not passive factor but it is an active factor.

4.in this it is assumed that the price level is determined only in long run but according to prof. Keynes long run is not acceptable for economic theory because in long run we are dead.

5. According to prof. Keynes there is not a proportion relationship between price level and a quantity of money buying reality price level is affected by many factors like change in cost, change in wage rate...

6. In this theory more importance is given to supply of money instead of demand for money.

#. Conclusion:-

There are many drawbacks in this theory but it has its own importance because thia was the first theory which determines the price level and value of money.