Introduction to Quantity Theory . What is the Fisher Equation? Fisher’s equation of the quantity theory of money consists of four variables; the velocity of money V, the money supply M, the price level P, and the number of transactions T . The value of money can be described by supply and demand of money the same as we determine the supply and demand of commodities. The quantity theory of money can be easily described by the Fisher equation. Wikipedia – Quantity Theory of Money – An overview of the quantity theory of money. b. inflation and the real interest rate both increase. The Quantity theory of money formula. Quantity Theory of Money: Income Version: Fisher’s transactions approach to quantity theory of money described in equation (1) and (2) above considers such variables as total volume of transaction (T) and average price level of these transactions are conceptually vague and difficult to measure. He in his book The Purchasing Power of Money (1911) has stated that the value of money The equation for quantity theory of money … According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth, a. inflation and the nominal interest rate both increase. Quantity Theory of Money Equation. According to the quantity theory of money, if the amount of money in an economy doubles, price levels will also double. c. the nominal interest rate and the real interest rate both increase. QUANTITY THEORY OF MONEY (QTM) Fisher’s Equation of Exchange or the Transaction Approach Irving Fisher an American economist put forward the Cash Transaction Approach to the quantity theory of money. Definition: Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another.When there is a change in the supply of money, there is a proportional change in the price level and vice-versa. It relates the inflation rate to the money supply in a very simple way. The quantity theory of money, which was pioneered by the 18th-century economists including Adam Smith and David Hume, was modified and popularized in 1911 by the American Economist, Irvin Fisher (1867 – 1947) in what is known as the equation of exchange: The individual equations can be solved as: M = PT / V. V = PT / M. P = MV / T. T = MV / P. Sources and more resources. According to Fisher, MV = PT. Fisher’s theory explains the relationship between the money supply and price level. This also means that the average number of times a unit of money exchanges hands during a specific period of time. Where, M – The total money supply; V – The velocity of circulation of money. The Fisher Equation lies at the heart of the Quantity Theory of Money. This means that the … The relationship between the supply of money and inflation, as well as deflation, is an important concept in economics.The quantity theory of money is a concept that can explain this connection, stating that there is a direct relationship between the supply of money in an economy and the price level of products sold. In the words of Fisher's, "Other things remaining unchanged, as the quantity of money in circulation increases , the price level also increases in direct proportion and the value of money decreases and vice versa". Quantity Theory of Money. It is supported and calculated by using the Fisher Equation on Quantity Theory of Money. The Fisher equation is a concept in economics that describes the relationship between nominal and real interest rates under the effect of inflation Inflation Inflation is an economic concept that refers to increases in the price level of goods over a set period of time. T is difficult to measure so it is often substituted for Y = National Income (Nominal GDP). This formula is also referred to as the equation of exchange. Therefore MV = PY where Y =national output. This theory of money equation states that the quantity of money is the main factor which determine value of money and the price level. MV=PT, where M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions.