Fisher’s equation of exchange considers money as
-
- A medium of exchange
- A store of value
- Measures of value
- All of the above
Correct Answer: A medium of exchange
Answer Explanation
Fishers equation of exchange is a theory formulated by American economist Irving Fisher. It describes the relationship between the quantity of money and the level of transactions in an economy. It can be expressed as follows:
MV=PT
Where,
M = Money supply
V = Velocity of Money (average number of times a unit of money is spent in a year)
P = Price level
T = Transaction volume
Money (M) is a crucial component of the equation since it represents the medium of exchange in an economy, specifically it represents how goods and services are purchased and sold. So, the correct answer is (a) A medium of exchange.
Why the other options are not correct
a. A store of Value
As a store of value, money serves some purposes in Fisher’s Equation of Exchange, but it is not the primary factor. The ability to hold onto money over time and retain its purchasing power is what makes money a store of value. Instead of considering money as a store of value, Fisher’s equation emphasizes its role as a medium of exchange.
c. Measure of value
In Fisher’s Equation of Exchange, The role of money as a measure of value is not specifically addressed. But it is in fact a measure of value, as it enables the comparison of the worth of different goods and services. The function of money as a medium of exchange is examined primarily through the equation. Which focuses on the relationship between money supply, velocity of money, price level, and volume of transactions.
d. All of the above:
The currency serves all three functions mentioned in the options (medium of exchange, store of value, and measure of value), but Fisher’s Equation of Exchange emphasizes its role as a medium of exchange in particular. In this equation, the price level and volume of transactions are used to analyze how changes in the money supply and velocity of money affect overall economic activity.
Conclusion
In conclusion, Fisher’s Equation of Exchange is a fundamental economic concept that illustrates the relationship between the money supply, velocity of money, price level, and volume of transactions in an economy. Despite its important role as a medium of exchange in facilitating transactions of goods and services, Fisher’s equation does not emphasize the importance of money as a store of value or a measure of value.
The significance of money and its various functions is essential to understanding the workings of an economy and formulating effective monetary policies.
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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