Fisher’s quantity theory is explained by his famous equation given as ________.

The correct answer is MV = PT.Key Points

• Fisher's quantity theory:-
  • It​ is a monetary theory that explains the relationship between money supply, velocity of money, price level, and output.
  • The famous equation given by Fisher is MV = PT, where M is the money supply, V is the velocity of money, P is the price level, and T is the level of transactions.
  • The equation suggests that an increase in the money supply (M) will lead to an increase in the price level (P), assuming that the velocity of money (V) and the level of transactions (T) are constant.
  • The theory also implies that changes in the money supply have a direct impact on inflation, as an increase in the money supply leads to an increase in the price level, which in turn reduces the purchasing power of money.

Additional Information

• The quantity theory of money has been subject to criticism over the years, with some economists arguing that it oversimplifies the complex dynamics of the economy.
• One of the criticisms is that the velocity of money is not constant and can vary significantly over time, making it difficult to predict the impact of changes in the money supply on the price level.
• Another criticism is that the theory assumes that the level of transactions is fixed, which is not always the case as it can be influenced by a variety of factors such as technology, demographics, and government policies.