Question

Provide a concise explanation of the following concepts:

1.crowding out

2.Eulers theorem

3.Equation of exchange(Fisher)

4.Cambridge equation(Marshall)

5.fisher equation

Answer 1

1. Crowding out

Crowding out happens when the government increases its borrowings substantially, causing the real interest rates to increase. The increase in the interest rates discourages private businesses to invest. Government borrowings crowd out private borrowings.

2. Eulers theorem

Eulers Theorem states that in case of a linear homogeneous production function, which exhibits constant returns to scale, the marginal product of labor multiplied by the number of laborers to which is added the total payment to capital equals the total product. The sum of the total marginal product is the total product.

3 .Equation of exchange(Fisher)

Fisher’s equation of exchange shows us the relationship between money supply, velocity of money, price level and aggregate transactions in the economy.

MV = PT

M= Money supply

V= Velocity ( how many times money is turned over)

T= Aggregate transactions

This means that the total transactions in the economy at the current price level equals the total money stock multiplied by it’s velocity.