Fisher's equation of exchange MV = PQ and the Quantity Theory of Money in relation to the monetarist model
Fisher's equation shows that the total money spent in an economy equals the total value of goods sold. Monetarists use this to argue that increasing the money supply directly causes inflation.
Formula
MV = PQ
Real World
After the 2008 crisis, the Bank of England created £375 billion through quantitative easing (raising M); monetarists warned this would cause inflation — and CPI did rise above 5% by 2011.
Exam Focus
State which variables monetarists hold constant (V and Q) before arguing ↑M → ↑P; missing this assumption is the most common mark-losing error.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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