Fisher and other classical economists in
their theory of demand for money had emphasized on the medium of exchange as a function
of money. Money is a means of buying goods and services.
All sorts of transactions
involving purchase of goods and services, raw materials, assets require payment
of money as value of the transaction mode. In any given period the value of all
goods and services sold must equal to the number of transactions (T) made
multiplied by the average price of these transactions. So, the total value of
transactions made is equal to PT. Because value paid is equal to the value of
money flow used for purchasing goods, services and assets, the value of money
flow is equal to the nominal quantity of money supply multiplied by the average
number of times the quantity of money in circulation is used or exchanged for
purposes of transaction. The average number of times single unit of money is
used for transactions of goods, services or assets is known as transactions
velocity of circulation and denote it by V. Thus, Fisher’s equation of exchange
is written as: MV = PT. Where, M = the quantity of money in circulation, V =
transactions velocity of circulation, P = Average price, T = the total number
of transactions. In view of Fisher, the nominal quantity of money M is fixed by
the Central Bank of a country and is therefore treated as an exogeneous
variable which is assumed to be a given quantity in a particular period of
time. The number of transactions in a period is a function of national income;
the higher the national income, the greater the number of transactions. Since
Fisher assumed full employment prevailing in the economy, the volume of
national income is determined by the amount of the fully employed resources.
Thus, with the assumptions of full employment, the volume of transactions T remains
fixed in the short run. Fisher assumes that velocity of circulation (V) remains
constant and is independent of M, P and T. The velocity of circulation of money
(V) is determined by institutional and technological factors involved in the process
of transactions. Since institutional and technological factors remain fixed in
the short run, the velocity of circulation of money (V) was also assumed to be
constant.
For money market to be in equilibrium, nominal
quantity of money supplied must be equal to the nominal quantity of money
demanded. For money market to be in equilibrium Ms = Md = M, where M is controlled
by the Central Bank of a country. We can rewrite Fisher’s equation of exchange
as: Md = PT/V; Md = 1/V. PT. Thus demand for money
depends on the following factors: The number of transactions (T), the average
price of transactions (P), the transaction velocity of circulation of money. It
has been pointed out that Fisher’s transactions approach represents some kind
of a mechnical relation between demand for money (Md) and the total
value of transaction (PT). Prof. Gupta has pointed out that in Fisher’s
approach the relation between demand for money Md and the value of
transactions (PT), ‘betrays some kind of a mechanical relation between PT and Md
and PT represents the total amount of work to be done by money as a medium of
exchange. This makes demand for money (Md) a technical requirement
and not a behavioral function.
No comments:
Post a Comment