Criticism Of Modern Transactions Theorist – Money Economy
The alleged Criticism Of Modern Transactions Theorist do really have a particular foundation as the case may be. However, they do not believe that other things do remain equal. They do not accept that an increase in the supply of money will occur with no changes in the demand or that the demand will increase with no change in the quantity of money and its velocity.
Rather the three immediate determinants may all fluctuate in any given period of time. For instance an increase in the quantity of money may be offset by decline in its velocity so that the general price level remains unaffected. Moreover an increase in M (money) and V (Velocity) may be offset in whole or in part by an increased in T, the volume of trade or the demand for money, or the rpice level may be stimulated by an increase in M (money) or V (velocity) and by a decrease in T.
In other words several combinations of changes in the Criticism Of Modern Transactions Theorist is an immediate determinants of the price level are possible. Thus it is the net effect of the diverse fluctuations that is reflected in actual price level changes.
Modern Transactions Theorist
What happens for instance in most periods of cyclical business expansion is that M (money), V (velocity) and T move upwards simultaneously but M (money) and V (velocity) in combination rise at a more rapid rate than does T so that a steady rise in prices result.
Similarly as activity is curtailed in the contraction phase of the business cycle, reductions occurs simultaneously in the three immediate determinants but the decline in the MV (money and velocity) takes place at a more rapid rate than does the decline in T. The result is a steady fall in prices.
If MV (money and velocity) equals money supply, PT (price and time) then represents the total purchases made in the economy within a given period of time.
The equation of exchange like all other equations is a truism. It is not a theory. It simply states that there is equilibrium on the hand between the quantities of all commodities services and property right sold during a year or any other period of time multiplied by the prices paid for them and on the other hand the total quantity of money given in the equation of exchange in a summation of similar equations for similar transactions.
As a truism it proves nothing. However the transactions theorist as to the Criticism Of Modern Transactions Theorist presented their theory by building on the basic framework of the equation. By making assumptions about the behaviour of the various factors in the equation they attempt to explain the determination of the general price level. For instance, they find in convenient to transpose the equation by dividing through by the factor T so that the equation goes like this;
P = MV/T
P = Price
M = Money
T = Time, transaction and transpose
With MV (money and velocity) as the numerator of the faction on the right hand side of the equation and the T, the demand for money as the denominator, the relationship between the supply of money MV (money and velocity), the demand for money T and the general price level P (price), now becomes clearer.
Hence they say that if the supply of money MV (money and velocity) is in the increase without a change in T, other things being equal , P (price) must also rise and in the same proportion similarly if the demand for money T rises without a change occurring in MV (value of money and velocity) , P (prices) must necessary fall in inverse proportion;
See equation below;
P = MV/T; P = MV/T
P = MV/T
P = Price
M = Money
T = Time, transaction and transpose.
See These Warm Up Exercise
- Modern transactions theorist do not believe that other things do remain equal (Discuss).
- What do you understand by monetary theory of the price level
- What is quantity theory?