UK Inflation

There is some empirical evidence to suggest this as inflation seems to have been fairly constant for the last few years (see appendix 2). If full employment conditions exist, then an increase in T is not possible in the short run, so an increase in M will result in an increase in P. If the total amount of all transactions is T, and the total amount of money is M, then M/T = V If you add P as the average price level, then you have the Equation of Exchange: MV = PT This tells you that, when V is constant, a change in M will lead to a change in P or T, or both. In 1986 there was a dramatic fall in oil prices, back down to almost mid 1970?s levels. Conclusion The empirical evidence of the correlation between raising interest rates (contracting the money supply and reducing consumer expenditure and demand) and subsequent falls in inflation would seen to bear out the Quantity Theory of Money. There is an increase in search time as people try to discover more about prices. In that case, OPEC rapidly and greatly increased the price of crude oil. In total, this meant that prices increased from around US$2 per barrel in 1970, to just under $40 in early 1980, with most of these increases having taken place in only around eighteen months. This means that the market for money is in equilibrium. Some people are now suggesting that the cycle of boom and bust has ended with the advent of e-commerce, as more and more firms employ increasingly fewer people, and are far more responsive to changes in demand. People will now find themselves holding excess money balances, because the money supply is greater t han 25% GDP: the supply of money has become greater than the demand for money, and V is less than 4. People will try to reduce their money holdings by spending on goods and services.