Revision:Classical Monetary Theory - The Traditional Quantity Theory

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Revision:Classical Monetary Theory - The Traditional Quantity Theory

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TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Classical Monetary Theory - The Traditional Quantity Theory

The Transactions Approach

Fischer equation: MV = PT ,

where:

= Money stock;
= velocity of circulation (average no of times each monetary unit is utilised in a given accounting period);
= general P level;
= total no of transactions.

If & assumed constant in ST, then: MV = PT - therefore $\Delta \to \Delta$

Here, increase in Money stock initiates price rises, and the transactions demand for money then responds passively to this Price increase. Ceteris Paribus, MD unit elastic.