Question

A classical economist wears a T-shirt printed with the slogan “Fast Money Raises My Interest!” Use the quantity theory of money and the Fisher equation to explain the slogan. (100 words maximum)

Answer 1

Answer) According to classical theory of money, there is a direct relationship between the level of money supply and the price level.

MV=PY

When the velocity of money is high i.e. money is frequently changing hands from one individual to another. Then it could result into inflation in the economy.

According to fisher equation

Real interest rate = nominal interest rate - inflation rate.

When the inflation is High, then the interest rates are raised to curb the adverse of impact of inflation.