The value of money in Fisher’s equation is determined by
- Demand for money
- Supply of money
- Demand and supply of money
- None of the above
Correct answer: c. Demand and supply of money
Answer Explanation
According to Fisher’s equation, money’s value is determined by (c) its demand and supply. An economy’s value of money is determined by the interaction between demand for money and supply of money.
In the demand for money, individuals, businesses, and governments hold money for a variety of reasons, such as transactions, precautionary motives, and speculative motives. As a result, people are willing to pay more for each unit of money when the demand for money increases. Conversely, if the demand for money decreases, people are willing to pay less for each unit of money, resulting in a lower value.
Money supply refers to the amount of money that is circulating in an economy, including currency, coins, and bank deposits. Money value decreases when the money supply is abundant because there is more money available for transactions. Conversely, if the money supply is scarce, there is less money available, leading to an increase in its value.
The value of money depends on the interaction between the demand for money and the supply of money (c). When the supply of money is equal to the demand of money, the value of money remain stable. When there is an imbalance between the two, the value of money adjusts accordingly to restore equilibrium.
Why the other options are not correct
a. Demand for money:
Demand for money does play an important role in determining the value of money, but it is not enough to fully explain its value. Besides the demand for money, money supply also influences the value of money. If we only take the demand for money into account, we ignore the impact of the money supply on the value of money.
b. Supply of money:
Also, focusing solely on the supply of money ignores the importance of money demand. The value of money is not solely determined by the amount of money available in the economy; it is also affected by how much people want to hold that money. It is impossible to fully understand the fluctuations in the value of money without taking into account the demand for money.
d. None of the above:
Selecting “None of the above” is incorrect, since both demand for money and supply of money are essential factors that together affect its value. In an economy, ignoring either of these factors would lead to an incomplete understanding of the dynamics of money value.
Conclusion
Fisher’s equation determines the value of money in an economy based on both the demand for money and the supply of money. When demand for money exceeds supply, the value of money increases, and when supply exceeds demand, the value of money decreases. For an understanding of fluctuations in the value of money and their implications for the economy, it is necessary to consider both the supply and the demand for money.
The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
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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