Monetary Polic1

Monetary Polic1 - the same dollar can purchase only 4...

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Monetary Policy According to the followers of the equation of exchange, the price level directly and proportionately depends upon quantity of money. But price level is inversely related to the value of money. Hence value of money is inversely proportional to the quantity of money. Money is general purchasing power . Therefore the capacity of a unit of money to purchase more or less goods will depend upon the level of prices. By way of example if the price of chocolates is 20 cents per piece then a dollar can purchase 5 chocolates but if its price rises to 25 cents per piece
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Unformatted text preview: the same dollar can purchase only 4 pieces of chocolates. Therefore with the rise in the price, the value of the dollar falls. Similarly with a fall in the price level, the value of the currency rises. We can relate this to the variations in the quantity of money. Increase in M → Rise in P → Fall in value of M Decrease in M → Fall in P → Rise in value of M This relationship forms the basis of the monetary policy ....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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