Quantity Theory of Money
BY
Roopak chithran
Mba @ tkm

MONEY??
•Money is something which is
freely used and generally
accepted as a medium of
exchange and/or as a unit of
account.

•It as something that serves as a medium
of exchange, a unit of accounting, and a
store of value.
•Money serves as a store of value in that
it allows us to store the rewards of our
labor or business in a convenient tool.

•Medium of exchange
•Measure of value
•Store of value

• its individual units must be capable of mutual
substitution (i.e., interchangeability).
• Durability: able to withstand repeated use.
• Portability: easily carried and transported.
• its value must be easily identified.
• Stability of value: its value should not fluctuate.

FUNCTIONS OF MONEY.
Money is a matter of function four functions :
• Money is a standard of deferred payments
• Money is a medium of exchange
• Money is a measure of value
• Money is a store of value.

1. Medium of Exchange:
• This is the central function of money. For
performing this function, money should have
general acceptability. Money as a medium of
exchange divides the exchange transactions into
two parts, namely, sale and purchase. This
function of money facilitates sale and purchase,
independent of each other.

2.Measure of value or Unit of value:
• Money serve as a unit of account. As Crother
puts it, "Money acts as a standard measures of
value to which all other things can be
compared." Money measures the value of
economic goods. Money works as a common
denominator into which the values of all goods
and services are expressed. When we express the
value of a commodity in terms of money, it is
called price and by knowing prices of the various
commodities, it is easy to calculate exchange
ratios between them.

3.Standard of Deferred Payments:
• Credit has become the life and blood of a
modern capitalist economy. In millions of
transactions, instant payments are not made.
The debtors make a promise that they will make
payment on some future date. In those
situations money acts as a standard of deferred
payments. It has become possible because
money has general acceptability, its value is
stable, it is durable and homogeneous.

4. Store of Value:
• Wealth can be conveniently stored in the form of
money. Money can be stored without loss in
value. Saving are secured and can be used
whenever there is a need. In this way, money
acts as a bridge between the present and the
future. Money means Goods and services. Thus,
money serves as a store of value.

Quantity
Theory Of
Money (QTM)

• In monetary economics, the quantity theory of
money (QTM) states that the general price level of
goods and services is directly proportional to the amount
of money in circulation, or money supply.
• The theory was challenged by Keynesian economics,
but updated and reinvigorated by the monetarist school
of economics.

• While mainstream economists agree that the
quantity theory holds true in the long run
• Critics of the theory argue that the direct
relationship between money supply and price
level does not hold.

Fisher’s equation of exchange
• Irving Fisher, who was one of the well-known
economists of the early 1900's, came up with the
“Equation of Exchange” concept. ...
That equation was MV=PT to explain the key
relationships as to how these variables interact with each
other and the economy. M is the money supply. V is the
velocity of money.

Fisher’s equation of exchange
• In its modern form, the quantity theory builds upon the
following definitional relationship.
MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes
hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services

Thankyou for listening 