Economics • Economic BasicsMedium
What does the 'Quantity Theory of Money' as formulated by Irving Fisher imply?
A. Changes in the money supply have no impact on the price level in the long run.
B. There is a direct proportional relationship between the money supply and the general price level.✓ Correct Answer
C. Velocity of money is highly unstable during economic booms.
D. Interest rates dictate the total quantity of currency in circulation.
💡 Solution & Explanation
Irving Fisher's Quantity Theory of Money, represented by the equation of exchange MV equals PT, asserts a direct proportional relationship between changes in the money supply and the general price level in the long run. It assumes that velocity and transaction volume remain relatively stable over the short term. Macroeconomic theories regarding money supply and inflation are fundamental to economics syllabi.
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