The Quantity Theory of Money Explain the causes of Inflation - Part 1

List the 4 functions of Money Money Means of differed payment Store of Value Means of Exchange Measure of Value

List the 7 qualities of Money Money ScarceDurable Stable in value DivisiblePortableAcceptableRecognisable

What would happen if money didn’t meet any of these functions or qualities?

Quantity Theory of Money MV ≡ QP ≡ is called an identity. It means that the equation must always balance. M X V must always equal Q x P M = the Money Supply V = the velocity of circulation P = the Price Level Q = the no of goods & services purchased/output

Crude Theory (QTOM) MV ≡ QP Holds V & Q constant & blames inflation on an increase in the money supply as if V & Q are held constant & M  then P must  Discredited as evidence now shows that V & Q are not constant

Sophisticated Theory (QTOM) MV ≡ QP All Variable but V is relatively predictable. An increase in M is not the only factor which causes inflation (P to  ). So there must be other factors, specifically changes to Q & V. If more goods and services produced then more money needed to pay for them, more money in circulation – moving around then……price level increases

Money Supply….