Question

According to Irving Fisher, when velocity and output are fixed, the quantity theroy of money implies that inflation equals money growth. What does the quantity theory imply for inflation in the long run in an economy with growing output and stable velocity?

Answer 1

In the long run, the quantity theory of money suggests that an increase in the money supply will lead to inflation in an economy with growing output and stable velocity.

Step-by-step explanation:

The quantity theory of money states that in the long run, inflation is primarily determined by changes in the money supply. When output is growing and velocity is stable, the quantity theory of money suggests that an increase in the money supply will lead to an increase in inflation. This is because with more money in the economy, there is more demand for goods and services, which can drive up prices.

Answer 2

It implies that inflation depends on the growth of the money supply.

Step-by-step explanation:

This idea is better known as the Quantity Theory of Money, which states that:

M*V = P*T

Where:

M = Money Supply

V = Velocity

P = Price level in the economy

T = Output in physical terms

Velocity is constant, and T is fixed by the factors of production, thus, only two variables vary: Money supply and price level.

This means that he higher the money supply, the higher the price level in an economy in the long-run, because as more money pours into the system, all prices expressed in monetary units rise because output has stayed the same. (there is the same amount of goods and services but now there is more money).

This is why hyperinflation has always been caused by an excessive growth of the money supply, mostly because of government printing.