*…show more content…*

ESSAYS POWERED BY

Words: 1014

Pages: 5

It can be written as MV +M`V` = PT. This theory showed what happens to the price level when the amount of money in circulation changes. Even though Irving Fisher only expanded and included two extra variables in the Equation of Exchange, he is usually given credit for it instead of Simon Newcomb, who came up with the original theory (MV = PT). In developing the Equation of Exchange, Irving Fisher also began working on index numbers. Before his time, the Laspeyres index and the Paasche index had been introduced. These two indices were very good at measuring changes in the cost of living from different points in time, but had some major faults. They either understated or overstated inflation. Fisher’s new price index, known as the “ideal” index, is simply the geometric mean of the Laspeyres index and Paasche formulas. However, he demonstrated that this index minimized the previous imperfections but still didn’t solve them completely. Even though imperfections were present in Fisher’s model, modern day economists believe this is inevitable, and therefore still use Fisher’s ideal index as a basis of their index number system. In addition, based on his statistical calculations he