Answer to Question #165014 in Economics for Susan

Question

1. Explain the factors that determine money demand in Fisher's quality theory and how each affect money demand ?

b.what determines velocity in Fisher's theory ?

c.what effect do interest rates have on velocity ?

Answer 1

V is the velocity of money circulation (the average number of times that each dollar or pound changes hands while securing transactions during the year).

In the short term, the speed indicator is constant, in the long term, it is a variable value that can be adjusted. The speed of money circulation is affected by:

banking infrastructure of the country;

technical equipment of institutions participating in monetary schemes;

economic activity.

The more perfect the satellite, computer communications, technical equipment of banking structures, the more intensively money turns around and the less money is required for the stable functioning of the economy.

The money supply required for payment transactions depends on the demand for money, the supply of banks.

Money turnover: change in the velocity of money circulation

A change in the velocity of money circulation is due to an increase or decrease in production volumes - with an increase in production, the speed increases, with a decrease, it slows down. The circulation of money indirectly depends on the phases of the economic cycle. Thus, during a crisis, the turnover of the money supply decreases.

Provided that prices are stable in the country, the following can be traced:

a slowdown in cash turnover is a sign of a decrease in GNP;

acceleration of the turnover of money - a criterion for the rise of GNP.

When inflation accelerates, money turnover increases equally.

A significant change in the indicator of the intensification of the money supply can be caused by a qualitative transformation of the money circulation system.

Velocity of money circulation: factors of movement

To calculate the turnover of money in the economy, an indicator is used that determines the speed of money circulation. Factors affecting the speed ratio:

General economic. Conditions - cyclical development of the economy, price movements.

Monetary:

changes in the structure of the payment circuit;

development of credit transactions;

the intensity of mutual settlements;

the level of interest rates;

the rate of development of production volumes;

the economic situation in the country.

The development of payment and settlement systems accelerates the circulation of money. The indicator of the intensification of the money supply reflects the inflation rate.

With economic recovery, the turnover of money will decline.