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Quantity Theory of Money
Monetary Policy
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MV = PT Where:- M = Money Supply V = Velocity of Circulation P = Price Level T = Transactions or Output Monetarists assume V and T are fixed, therefore M will directly impact P
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Narrow and Broad Money Narrow Money (M0) Broad Money (M4)
A measure of notes and coins in circulation Broad Money (M4) M0 + bank accounts. It includes retail bank and building society deposits + wholesale bank and building society deposits M1 to M3 exists but are not as widely used
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Lending and Inflation Greater lending increases money balances
Increased money balances are spent on goods and services This enables firms to increase prices – Demand Pull Inflation Also, labour becomes more scarce and wages rise – Cost Push Inflation
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A Conflict - Imported Inflation
Increased demand for Goods and Services increases the demand for Imports This is a leakage which reduces Money Supply As money £s are available on the foreign exchanges, the value will fall This makes UK goods cheaper, increasing Exports and potentially causing Inflation
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