Essay Plans

'The weakness of the assumption that V is a constant in the Quantity Theory of Money invalidates the whole theory'. Discuss.

SYNOPSIS:

POINTS:

State, define and explain the quantity theory of money (MV - PT etc).
V is a behavioral assumption which cannot be verified. It is deduced from the findings of the other three.
M - the definition varies. There is doubt whether it can be controlled thus there is doubt whether even if V is a constant, the theory is valid. Keynesians argue that if P rises then so does M; monetarists argue the other way round.
V is affected by habit, season and is subject to speculative influences.
If inflation is caused by cost push pressures, demand for money will increase which then affects its supply.
If V is unstable, MV is also thus attempts to control P by controlling MV will fail.
(This is a very much shortened version - students should refer back to the essay on inflation.)