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equivalents that can be converted easily to cash. M2 includes M1 and, in addition,
short-term time deposits in banks and certain money market funds. M3 includes M2 in
addition to long-term deposits.

The quantity theory of money has been put forward in the form of an equation
known as the “Equation of Exchange”. It is also known as Fisher’s equation:
M*V = P*Q (6.1)
M - amount of money,
V - velocity of circulation of money,
P - price level,
Q - quantity of product.
Velocity of circulation (V) refers to the number of times that each unit of
money is used during a given period. The equation tells when the supply of money
increases, other things being equal, there will be a rise in the price level. That means a
fall in the value of money. For example, when ‘M’ is doubled, ’P’ will be doubled.

Inflation is a general and ongoing rise in the level of prices in an entire
economy.
Demand–pull Inflation is loosely described as “too much money chasing too
few goods”. This refers to the situation where general price level rises because the
demand for goods and services exceeds the supply available at the existing prices
Cost–push inflation is induced by rising costs, including wages, so that rising
wages and other costs push up prices. We can also speak of wage inflation or price
inflation when we mean increase in wages or prices.
Types of Inflation.
1 Сreeping inflation.
Creeping or mild inflation is when prices rise 3% a year or less. According to
the U.S. Federal Reserve, when prices rise 2% or less, it's actually beneficial to
economic growth. That's because this mild inflation sets expectations that prices will
continue to rise. As a result, it sparks increased demand as consumers decide to buy
now before prices rise in the future.
2 Walking inflation.
This type of strong, or pernicious, inflation is between 3-10% a year. It is
harmful to the economy because it heats up economic growth too fast. People start to
buy more than they need, just to avoid tomorrow's much higher prices. This drives
demand even further, so that suppliers can't keep up. More important, neither can
wages. As a result, common goods and services are priced out of the reach of most
people.
3 Galloping inflation.
When inflation rises to ten percent or greater, it wreaks absolute havoc on the
economy. Money loses value so fast that business and employee income can't keep up
with costs and prices. Foreign investors avoid the country, depriving it of needed
capital. The economy becomes unstable, and government leaders lose credibility.
Galloping inflation must be prevented.
4 Hyperinflation.
Hyperinflation is when the prices skyrocket more than 50% a month. It is

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