Answer to Question #286688 in Macroeconomics for Msb

Question

a) Discuss the link between the quantity theory and the fisher effect

b) What does the Quantity Theory of Money State?

c) Define fiat money, commodity money, and seigniorage.

Answer 1

Solution:

a.). According to the Quantity Theory of Money and the Fisher Effect, if the central bank increases the rate of money growth, inflation and the nominal interest rate both increase.

 

b.). According to the quantity theory of money, the general price level of goods and services in an economy is proportional to the money supply if the real output is constant and the velocity of money is also constant.

 

c.). Fiat money is a currency issued by the government that is not backed by a physical commodity, such as gold or silver.

Commodity money is money whose value is derived from the commodity from which it is derived. Commodity money is made up of objects that have value or use in and of themselves, as well as their value in purchasing goods.

Seigniorage refers to the difference between the face value of money, and the cost of producing it.