Page 118 - DECO402_Macro Economics

Unit-12: Demand of Money: Quantity Theory of Money

9. Supply of money depends on two factors- (i) quantity of money (ii) velocity of money Notes
10. Purchasing power of money is known as value of money.

12.7 Summary

y The Quantity Theory of Money states that, there is a direct and proportionate relation between
quantity of money and general price-level and an inverse proportionate relation between
quantity of money and value of money. As per this theory, by an increase in quantity of
money price level increase in the same proportion and by a decrease in quantity of money,
price level decreases in the same proportion.

12.8 Keywords

y Price level—Value level.
y Quantity—Amount.

12.9 Review Questions

1. What is known as value of money? Clarify.
2. Tell the theories of value of money.
3. Describe two equations of the quantity theory of money.
4. Mention the concepts of demand for money and supply of money in Fisher’s Equation.

Answers: Self Assessment
1. Value 2. inverse 3. increas 4. (a)
5. (b) 6. (a) 7. True 8. True
9. True 10. True

12.10 Further Readings

Books 1. Macroeconomics— S.K. Chakrabvarty, Himalaya Publishing house, 2010.
2. Macroeconomics Economic growth, fluctuations and policy— Robert E
Hall and David H. Paipal, Vaina Books, 2010.
3. Macroeconomics: Theory and Policy— H.L Ahuja, S. Chand Publisher,
2010.

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