Lesson 10. Irving Fisher. Pioneer In Monetary Theory

(1867-1947)

1. As you read this text look for the answers to the following questions:

5. Where did Irving Fisher spend most of his adult life?

3. How did he use his skills of a mathematician?

4. What did he show in his best known formulation?

5. How does the text illustrate his formulation?

5. What does his equation of exchange help to explain?

Irving Fisher spent most of his adult life as a professor of economics at Yale University. An accomplished mathematician, he used those skills to explain many of his theories. In his best known formulation, the equation of exchange. Professor Fisher showed the relationship between the quantity of money in circu­lation and the level of prices.

The equation of exchange is stated as follows:

MV = PQ, where:

M = money supply

V = velocity of circulation

P = average price of goods and services

Q = quantity of units sold

Simply stated, the equation of exchange tells us that total spending is equal to the total value of the goods and services produced by the economy. Let's see why.

M is the total amount of money in circulation, and V is its velocity. Velocity is simply the number of times that money turns over in a year. In other words, the amount of money in circulation, multiplied by the number of times it is spent (MV) is equal to the total amount of money spent by the economy in the course of the year.

To illustrate, let's suppose that each student in your class produced a product for sale, and that the selling price of each item is $1. Your teacher buys the product from the student sitting in the first row, first seat. That student uses the dollar to buy the product from the student in the second seat.

The process continues around the room as each student uses the dollar from the preceding student to buy the product of the next student. Assuming that there are 30 class members (including the teacher), 30 items will be sold. One dollar bill will be exchanged 30 times. Applying the equation of exchange, the total amount of money in circulation will be $30 because:

M = $1; V = 30; and MV = $1 x 30 = $30.

The equation of exchange helps to explain why prices (and therefore the value of money) fluctuate. Since MV = PQ, it follows that when V and Q are constant, any change in the money supply will directly affect prices. In other words, when the money supply increases, so will prices, and vice versa. We can also see that increases in the money supply will not result in price increases if the output of goods and services is increased at the same or a faster rate.

II. Match each item in Column A with its definition in Column B:

	Column A		Column B
	adult		making equal
	to accomplish		grown to full size or strength
	equation		property of things which can be measured
	quantity		having a horizontal surface
	level		worth of smth. when compared with smth. else
	total		complete
	to be equal to		to go round continuously
	value		state of being circulated
	to circulate		to perform
	circulation		Speed
	velocity		to be the same in size

III. Complete the phrases with prepositions (where it is necessary) and say in what situations they are used in the text. Use them in sentences of your own.

1. money … circulation

2. … other words

3. the amount … money

4. to be equal …

5. … the course of the year

6. the equation … exchange

7. change… the money supply

8. to affect … prices

9. increase … the money

10. to result …

11. output …

IV. Give Russian equivalents for the following words or word combinations from the text:

1. adult life

2. an accomplished mathematician

3. quantity of money in circulation

4. level of prices

5. the equation of exchange

6. total spending

7. velocity

8. to fluctuate

9. to result in

5. Discuss the following:

Professor Fisher showed the relationship between the quantity of money in circulation and the level of prices.

VI. Complete the table. Work out your point of

view on Fisher’s theory.

Appraisal Ideas And Beliefs	Still Relevant	Needs Modification	Should Be Rejected
1.See the model on p. 2….

Give your reasons.

 Тексты заимствованы из:

1.Учебника для высшей школы США по экономике «Applied Economics – Junior Achievements,1990».

2.The Internet.

3