What is Fisher’s Exposition of Quantity Theory of Money?

By manipulation of the equation of Exchange:

MV = PT, Fishers stated P = MV/T, which implies that the quantity of money (M) determines the prices level (P) and the latter varies directly in proportion to the changes in the stock of money, assuming T and V to be constant.

In this equation of exchange, however, only primary money or currency money is conceived. But in the modern economy, money includes not only notes and coins, but also demand deposits of banks or credit money.

Consequently, Fisher has extended the equation of exchange to include bank deposits also. He denotes M for demand deposits in the bank money, and V for the velocity of circulation of bank money. Thus, the extended form of the equation of exchange is written as:

P = MV+M’V’/T

It is easy to see from this equation that the price level is determined by the following factors:

(a) The quantity of money in circulation (M);

(b) The velocity of circulation of money (V);

(c) The volume of bank money (M’);

(d) The velocity of circulation of bank money (V’); and

(e) The volume of trade or transactions, that is, v the amount of goods bought by money (T). 