Quantity
theory of money
The
foundation stone of monetarism. The theory says that the quantity of money
available in an economy determines the value of money. Increases in the money
supply are the main cause of inflation. This is why Milton Friedman claimed
that 'inflation is always and everywhere a monetary phenomenon'.
The
theory is built on the fisher equation, mv = pt, named after Irving fisher
(1867-1947). M is the stock of money, v is the velocity of circulation, p is
the average price level and t is the number of transactions in the economy. The
equation says, simply and obviously, that the quantity of money spent equals
the quantity of money used. The quantity theory, in its purest form, assumes
that v and t are both constant, at least in the short-run. Thus any change in m
leads directly to a change in p. In other words, increase the money supply and
you simply cause inflation.
In
the 1930s, Keynes challenged this theory, which was orthodoxy until then.
Increases in the money supply seemed to lead to a fall in the velocity of
circulation and to increases in real income, contradicting the classical
dichotomy (see monetary neutrality). Later, monetarists such as Friedman
conceded that v could change in response to variations in m, but did so only in
stable, predictable ways that did not challenge the thrust of the theory. Even
so, monetarist policies did not perform well when they were applied in many
countries during the 1980s, as even Friedman has since conceded.
Quartile
Part
of the “ile” family those signposts positions on a scale of numbers. The top quartile
on, say, the distribution of income, is the richest 25% of the population.
Queuing
Market
failure? Not necessarily. Usually a queue reflects a price that is set too low,
so that demand exceeds supply, so some customers have to wait to buy the
product. But a queue may also be the result of deliberate rationing by a
producer, perhaps to attract attention - by a restaurant that wants to appear
popular, say. Customers may regard a queue, such as a waiting list for health
treatment, as a fairer way to distribute the product than using the price
mechanism.
Quota
A
form of protectionism. A country imposes limits on the number of goods that can
be imported from another country. For instance, France may limit the number of
cars imported from Japan to, say, 20,000 a year. As a result of limiting
supply, the price of the imported good is higher than it would be under free
trade, thus making life easier for domestic producers.
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