Boom or Prosperity:
1. The employment and the movement of the economy beyond full employment is the characterized features of boom.
2. There is hectic activity, money wages rise, profits increase, interest rates go up, demand for bank credit increases.
3. There is all round optimism.
Recession:
1. The turning point from boom condition is recession.
2. Failure of a company or bank brings a phase of recession.
3. Investments are drastically reduced, production falls, income and profits decline.
4. There is panic in the stock market and business is dull.
5. Liquidity preference of the people rises and money market becomes tight.
Depression:
1. The level of economic activity becomes extremely low.
2. Firms incur loss and close down resulting in unemployment.
3. Interest rate, profits, wages are low.
4. Agricultural class and wage carners are badly affected.
5. Banks do not lend to businessmen.
6. The extreme point of depression is called as "trough".
7. Keynes said that autonomous investment of the government can help the economy to come out of depression.
Recovery:
1. After depression, recovery sets in the upswing.
2. It begins with the revival of demand for capital goods.
3. The demand slowly picks up and in due course there is more production, profit, income, wages and employment.
4. Recovery may be initiated by innovation or investment or by government.

Causes:
Increase in Money Supply:
1. Increase in money supply leads to increase in aggregate demand.
2. The higher the growth rate of nominal money supply, the higher is the rate of inflation.
Increase in Disposable Income:
1. When disposable income increases, it raises their demand for goods and services.
2. Disposable income may increase with the rise in national income or reduction in taxes or saving of the people.
Increase in Public Expenditure:
1. Government activities have been expanding due to developmental activities and social welfare programmes.
2. This is also a cause for price rise.
Increase in Consumer Spending:
1. The demand for goods and services increases when they are given credit to buy goods on hire-purchase and instalment basis.
Cheap Monetary Policy:
1. Cheap monetary policy leads to increase in the money supply which raises demand for goods and services.
Deficit Financing:
1. To meet the expenses, government resorts to deficit financing by borrowing from the public and even by printing more notes.
2. This raises aggregate demand leading to inflation.
Black Assets, Activities and Money:
1. It leads to corruption, tax evasion.
2. People spend black money lavishly.
3. Black marketing and hoarding reduces the supply of goods and increases.
Repayment of Public Debt:
1. Whenever government repays its past internal debt to the public, money supply increases.
Increase in Exports:
1. When exports are encouraged, domestic supply of goods decline, prices rise.
Effects:
On Production:
1. When inflation is very moderate it is an incentive to traders and producers.
2. When profit increases the business men increase their investments in production leading to more employment and income.
3. Hyper inflation leads to depreciation of the value of money and discourages savings.
4. It may even drain out the foreign capital already invested in the country.
5. The reduced capital accumulation, discourage entrepreneurs and business men from taking business risk.
6. Inflation also leads to hoarding of essential goods by traders and consumers leading to still higher inflation rate.
7. Encourages investment in speculative activities rather than productive purposes.
On Distribution:
Debtors and Creditors:
1. During inflation debtors are the gainers.
2. Debtors had borrowed when the purchasing power of money was high and now repay the loans when the purchasing power of money is low due to rising prices.
Fixed-income Groups:
1. They are worst hit because their incomes being fixed has no relationship with the rising cost of living.
Entrepreneurs:
1. Inflation is a boon to manufacturers, traders, merchants, businessmen, because it serves as a tonic for business enterprise.
2. They get windfall gains as the prices of their stocks suddenly go up.
Investors:
1. Those who invest in fixed interest yielding bonds and securities lose during inflation.
2. Those who invest in shares stand to gain by rich dividends and appreciation in value of shares.

(i) Primary Functions:
Medium of exchange:
(i) Money has general acceptability and all exchanges take place in terms of money.
(ii) First, money is got through sale of goods or services.
(iii) Later, money is used to buy goods and services.
(iv) Thus, in the modern exchange system money acts as the intermediary in sales and purchases.
Measure of value
(i) Money measures the value of goods and services.
(ii) Prices of all goods and services are expressed in terms of money.
(iii) Since all the values are expressed in terms of money, it is easier to determine the rate of exchange between various types of goods in the community.
(ii) Secondary Functions:
Store of value:
(i) Savings is done in terms of money.
(ii) Money is a store of wealth, as it can be easily converted into other marketable assets such as land, machinery, plant.
Standard of Deferred Payments:
(i) Borrowing and lending is done in money.
Means of Transferring Purchasing Power:
(i) The field of exchange went on extending with growing economic development.
(ii) The exchange of goods is now. extended to distant lands.
(iii)  So it is necessary to transfer purchasing power from one place to another.
(iii) Contingent Functions:
Basis of the Credit System:
(i) Business transactions are either in cash or on credit.
(ii) A depositor uses cheques only when there are sufficient funds in his account.
(iii) The commercial banks create credit on the basis of adequate cash reserves.
(iv) Money is at the back of all credit.
Money facilitates distribution of National Income:
(i) Money is used in the distribution of income as rent, wage, interest and profit.
Equalize Marginal Utilities and Marginal Productivities:
(i) Consumer gets maximum utility only if he incurs expenditure on various commodities in such a  manner as to equalize marginal utilities accruing from them.
(ii) Here, money plays an important role, because the prices of all commodities are expressed in money.
(iii) Money helps to equalize marginal productivities of various factors of production.
Increases Productivity of Capital:
(i) Money is the most liquid form of capital.
(ii) It can be put to any use.
(iii) So it can be transferred from the less productive to the more productive uses.
(iv) Other Functions:
Maintains Repayment Capacity:
(i) Money has general acceptability.
(ii) To maintain its repayment capacity, every firm has to keep assets in the form of money.
(iii) Firms, banks, insurance companies and governments have to keep some liquid money (i.e., cash) to maintain their repayment capacity.
Represents Generalized
Purchasing Power:
(i) Purchasing power kept in terms of money can be put to any use.
Gives liquidity to Capital:
(i) Money is the most liquid form of capital & so can be put to any use.

Introduction:
(i) It was first propounded in 1588 by an Italian economist Davanzatti. It was popularised by an Americill economist, Irving Fisher is his book, "The Purchasing Power of Money" in 1911. He gave it a quantitative form in terms of "Equation of Exchange".
Equations:
MV = PT
(i) The Supply of Money = Demand for Money
M = Money Supply
V = Velocity of Money
P = Price level
T = Volume of Transaction.
(ii) The total quantity of money will be equal to the total value of all goods and services bought and sold.
\(P=\frac{M V}{T}\)
(iii) The quantity of money determines the price level and the price level varies directly with the quantity of money provided 'V' and 'T' remain constant.
(iv) Later Fisher extended his exchange to include bank deposits M₁ and its velocity V₁.
\(P T =M V+M^{\prime} V^{\prime} \)
\(P =\frac{M V+M^{\prime} V^{\prime}}{T}\)
- The price level is determined by
(a) quantity of money in circulation M
(b) velocity of circulation of money V
(c) volume of bank credit money M₁
(d) velocity of circulation of credit money V₁
(c) Volume of trade ('T')

(i) It show's the effect of changes in the quantity of money on the price level.
(ii) When quantity of money is OM₁, the price level is OP₁.
(iii) When the quantity of money is doubled to OM₂, the price level is also doubled to OP₂.
(iv) When quantity of money is increased four-fold to OM₄, the price level also increases by 4 times to OP₄ his relationship is shown by the curve OP = f(M) from the origin at 45^o.
Quantity of money
(i) Fig B shows the inverse relation between the quantity of money and the value of money.
(ii) Value of money is taken on the vertical axis.
(iii) When the quantity of money is OM₁, the value of money is OI / P₁.
(iv) When quantity of money is doubled to OM₂, the value of money becomes one half of what it was before (OI / P₂)
(v) When quantity of money increases by the four fold to OM₄, the value of among is reduced by OI / P₄
(vi) This inverse relationship between the quantity of money and the value of money is shown by downward sloping curve 1 / OP= f(M).