ECONOMICS - YEAR 13 MISS MCN

What is fishers equation of exchange?

MV = PQ

What does each letter stand for in MV = PQ?

M - money supply (how much money is circulating in the economy)

V - velocity of circulation (how quickly money is spent)

P - price level (the average price of goods and services)

Q - real output (the amount of goods and services produced)

Give the process if the government/central bank increases the money supply?

• M increases

• if V stays constant and Q (real output) cant increase, the only thing that can increase to keep the equation balanced is P

• so M increases and P increases

• inflation increases

Why is "fishers equation of exchange" associated with monetarism?

As they argue if the money supply grows too quickly, it can cause inflation (too much money chasing too few goods)

What are 6 different types of markets?

1. Stock market - shares in companies

2. Bond market - government and corporate bonds

3. Foreign exchange market (FOREX) - different currencies

4. Money market - short term borrowing/lending

5. Commodity market - raw materials/commodities

6. Derivatives market - contacts whose values depends on an underlying asset

What are the 4 functions of money?

Medium of exchange, measure of value, store of value, method of deferred payment

What are the characteristics of money?

Durability, portability, divisibility, difficult to forge, limited supply, acceptability

What are the 3 types of money?

Notes/coins, deposits (non cash assets but still liquid), near money (bonds)