Equation of exchange is associated with
-
- Pigou
- J.B. Say
- Marshall
- Irving Fisher
Correct Answer: d. Irving Fisher
Answer Explanation
A correct answer is (d) Irving Fisher. Irving Fisher was a prominent economist during the early 20th century, and he developed the equation of exchange.
Equation of exchange:
This equation represents the relationship between the money supply, the velocity of money, the price level, and the volume of transactions in an economy. It can be expressed as follows:
MV=PT
Money supply is represented by M
V represents the velocity of money
P represents the price level (average price of goods and services).
T represents the volume of transactions (the total quantity of goods and services exchanged).
An economy’s total nominal value of transactions (PT) equals the total money spent on goods and services (MV).
Relationships in the equation
Money Supply (M) and Velocity of Money (V):
The left side of the equation represents the total amount of money spent on goods and services in the economy. When the money supply or velocity of money increases, goods and services will be more expensive.
Volume of Transactions (T) and Price Level (P):
The right side of the equation (PT) represents the total nominal value of all transactions in the economy. Transactions (PT) increase in value when the price level (P) increases or as more goods and services (T) are exchanged.
In the equation of exchange, economists analyze the factors that affect economic activity and inflation in an economy, focusing on the role of money supply and velocity in determining spending and price levels.
Why the other options are not correct
a. Pigou:
This option is incorrect because the equation of exchange is not associated with Pigou. Arthur Cecil Pigou was a prominent British economist who wrote about welfare economics and externalities. Although he has contributed significantly to economics, he is not credited with developing the equation for exchange.
b. J.B. Say:
This option is incorrect because Jean-Baptiste Say, a French economist, is not associated with the equation of exchange. In a free market, overproduction cannot occur because supply creates its own demand. In contrast, the equation of exchange is a concept related to monetary economics, specifically the relationship between money supply, price level, and economic transactions.
c. Marshall:
This option is incorrect because the equation of exchange is not associated with Alfred Marshall. Among the pioneers of microeconomics, Alfred Marshall was known for his work on supply and demand, consumer surplus, and elasticity. Despite his significant contributions, he did not develop the equation of exchange.
Conclusion
According to the economist Irving Fisher, the equation of exchange represents the relationship between money supply, velocity of money, price level, and volume of transactions in an economy. Economists can analyze economic activity and inflation by understanding the equation of exchange.
Irving Fisher’s contributions to monetary economics have had a lasting impact on the study of money, prices, and economic transactions.
If the quantity of money increases 100%, other things remaining constant, value of money changes by
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