Quantity Theory Of Money Essay

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This section includes the current investigation and version of the economist regarding the quantity theory of money (QTM). Under it, we will analyze the latest and most renowned version of Ajuzie Emmanuel I.S. et al. (2008) has investigated the quantity theory of money in the current context. This new formulation of quantity theory of money includes the following assumptions.
- Money is exogenously determined.
- Value of circulation is determined by the changes in price levels rather than amount of money available or current price level.
- Changes in velocity of money occur due to the factors like changes in transportation, new financial institution and other exogenous factors.
- Velocity of money is assumed to remain more or less stable in the long run.
- Inflation is the long run phenomenon.
- Real GDP is determined by the availability of labor, capital, natural resources, knowledge, and entrepreneurship.
- Economy is assumed to operate with full employment in the long run.

Based on the above assumptions, current investigation of Quantity Theory of Money emphasizes
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It is here considered as currency (including coins), bank deposits, and traveler’s cheques. is the velocity of money. This reflects financial institutions and other economic conditions. is the deflator. It is a weighted average of prices of all final goods and services produced in the economy. It is, therefore, the broadest-based measure of the nation’s price level. is the total market value of final goods and services produced in the economy during one year of time. A rise in money supply, through its impact on aggregate demand, results in an increase in nominal . If velocity of money is held constant, an increase in nominal is proportional to the increase in money supply. In order to determine the impact of a rise in money supply on inflation/price rate, we rewrite equation (2.21) to obtain equation
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