 |
 |
     |
Monetary Policy - Inflation - CausesFurther work - Stability of the velocity of circulationThe Fisher equation of exchange says that: MV = PT Classical economists assume from this equation that the value of the velocity of circulation and the number of transactions are relatively stable. This means that any increases in the money supply will feed directly through to prices. Keynesians have always disputed that V is stable. If you look at the figures for the velocity of circulation, what you should see is that the velocity of circulation of M0 has gradually risen over the years. A possible reason for this is the increased use of plastic (credit and debit cards) to pay for goods and services. This reduces the amount of cash people need to hold. Slightly oddly the growth of cash machines has probably also contributed to the growth in circulation. Cash machines give people access to their cash night and day, with a considerably greater degree of convenience. This tends to reduce the amount of cash people hold day to day. The velocity of circulation of M4 gradually fell during the 1980s, though this trend ended in the 1990s. The main reason for this is changes in the way people hold their money. As the nature of accounts available changes, people will move their money. In the 1980s, savings were moved increasingly into bank and building society accounts as they offered higher rates of interest. Why not study the money supply figures in the data section a little more closely to see if you can identify recent trends in the way people are holding their money? |
||||||
