Hi guys, I study economics in high school and I recently came across the fisher equation. I found out there there is a divide between monetarists and Keynesians as to whether V and Q are constant. I’d really appreciate it if someone could explain which one is correct and why.
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I assume by q you mean m as in the money supply or quantity of ot. The fisher equation is m*v=p*t. If we assume that v is fixed then we are saying that, all else equal, the growth in the money supply directly leads to the growth in prices. It’s logical that increases to the money supply simply means that prices will go up, but of course this a perfectly sterile version of how an economy works. In reality, prices, and everything else, takes time to adjust so it will never be a direct instantaneous relationship.
This is where economists disagree because while the relationship between the money supply and prices is real and positive, the level of this relationship is debated.
Now for policy issues, this is the real divide. In general the fisher equation assumes that any additional money supply will just lead to price growth and no changes in demand. For this reason, many economists believe the growth of the money supply should be constant. But the Keynesian school of thought is that because the money supply and prices don’t move at exactly the same time we can stimulate growth by using monetary policy to increase demand when it is needed. Increasing demand can lead to real growth of the economy which would mean the fisher equation is not perfectly accurate at the macro economic level. (Hint: very few things are fully accurate at the macro level.)
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