This is expressed by the quantity equation, mv pt, where m is the quantity of money, v is the velocity of circulation, p is the price level, and t is the volume of transactions. The quantity theory of money qtm refers to the proposition that changes in the quantity of money lead to, other factors remaining constant, approximately equal changes in the price level. Just as in that formulation the modern quantity theory is concerned with the determination of the money national income incorporating prices and output. The economic theories of milton friedman have as much merit today as they did in the 1970s.
Most economic historians who give some weight to monetary forces in european. In friedman s modern quantity theory of money, the supply of money is independent of demand for money. Chapter 19 the demand for money 516 p a r t 6 monetary theory stability of money demand if the money demand function, like equation 4 or 6, is unstable and undergoes 51 stantial unpredictable shifts, as keynes thought, then velocity is unpredictable, and quantity of money may not be tightly linked to aggregate spending, as it is in the m ern. In friedmans modern quantity theory of money, the supply of money is independent of demand for money. The quantity theory of money takes for granted, first, that the real quantity rather than the nominal. Any attempt to put his contributions to economics into perspective can only begin to suggest the vast variety of ideas he discussed. The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. Macroeconomics monetarism and the quantity theory of money 3 of. A restatement published as the lead essay in studies in the quantity theory of money 1956, a collection of papers derived from dissertations written by members of the workshop in money and banking at chicago. Velocity is determined by transaction technology factors e. Friedman s demand for money md function1 friedmans md function is the single most important element of the new and improved version of the quantity. He however realised that there was a need to restate or reformulate the quantity theory of money which should reestablish the importance of money determining the level of economic activity and the price level.
Pdf this study approaches the quantity theory of money at a conceptual. Friedman, milton 1961, the lag in effect of monetary policy, journal of political. Friedman argued that the major economic episodes in. Department of economics university of toronto modern quantity theories of money. Friedman asserted that events of 1930s had been wrongly assessed and did not in fact offer evidence against the quantity theory of money. The quantity theory of money takes for granted, first, that the real quantity rather than the. Milton friedmans monetary economics and the quantity. The demand for money friedman s work on the demand for money began with the quantity theory of money. Before friedman, the quantity theory of money was a much simpler affair based on the socalled equation of exchange money times velocity equals the price level times output mv pyplus the assumptions that changes in the money supply cause changes in output and prices and that velocity changes so slowly it can be safely treated as a constant. The monetarism and friedmans modern quantity theory of.
Some of the modern approaches involve mining and exploring a single body of. Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another. Friedman 1970 the counterrevolution in monetary theory. Friedmans work on the demand for money began with the quantity theory of money. Thereafter, the variance increased to between almost. The theory that the price level is proportional to the quantity of money.
This theory dates back at least to the mid16th cen. The doctrinalhistory aspects in the paper under discussion, friedman once again see friedman 1956, 1968 presents a theory of money whose central feature is a demand func tion for money, where this demand is treated as part of capital or wealth. Modern qtm refers to friedman s reformulation or restatement of the earlier simple or crude qtm or friedman s qtm, first presented by him in his wellknown article, quantity theory of money a restatement friedman, 1956, repeated in friedman 1968 b. The optimum quantity of money federal reserve bank of.
Quantity theory of money collected works of milton friedman. This is important because it shows why friedman s modern quantity theory of money lost much of its explanatory power in the 1970s, leading to changes in central bank targeting and monetary theory. Even in the current economic history literature, the version most commonly used is the fisher. Friedmans modern quantity theory of money quantity. We shall conclude with a discussion of policy implications, giving special attention to the likely implications of the worldwide fiat money standard. Studies in the quantity theory of money milton friedman on. Brief powerpoint on milton friedman quantity theory of money. Due to the actions of the monetary authorities, the supply of money changes, whereas the demand for money remains more or less stable. Modern economists, however, have more or less resolved that problem by ignoring the total volume of transactions, and by looking instead. The money demand should depend on the total wealth, the reason being wealth measures the size of. Macroeconomics monetarism and the quantity theory of. Modern quantity theory of money predicts that the demand for money should depend not only on the risk and return offered by money but also on the various assets which the households can hold instead of money.
Describe friedmans modern quantity theory of money. Pdf the quantity theory of money qtm refers to the proposition that changes in the quantity of. Friedman s quantity theory of money ppt xpowerpoint. Friedman allowed the return on money to vary and to increase above zero, making it. Studies on the quantity theory of money 1956 qtm was a theoretical approach that insisted the money does matter that any interpretation of short term movements in economic activity is likely to be seriously at fault if it neglects monetary changes in repercussions and if it leaves unexplained why people are willing to hold the particular. Monetary theory requires a formulation based on a general theory which can bring all monetary phenomena into the same logical frame. In this survey, we shall first present a formal statement of the quantity theory, then consider the keynesian challenge to the quantity theory, recent developments, and some empirical evidence. Defying keynes and most of the academic establishment of the time, friedman presented evidence to resurrect the quantity theory of money the idea that the price level depends on the money supply. As an alternative to fishers quantity theory of money, marshall, pigou, robertson, keynes, etc.
Until modern times, money was mostly metallic copper, brass. When more money is in circulation, more business transactions are enabled and more money gets spent, stimulating the economy, according to proponents of the theory. Burton 1981, 53 commented that attempting to portray the work of milton. I had to do it for a class, so uploaded to help out others in the future. Friedman s income version a while the cambridge cash balances approach apparently resolved the problem of v, it did not resolve the quite intractable problem of t. The most famous proponent of monetarist theory was the late nobel laureate economist milton friedman, who famously laid the blame for the great depression with the federal reserve. Milton friedman restates the quantity theory of money and discusses the significance of its revival after a period of eclipse by the keynesian view. It is supported and calculated by using the fisher equation on quantity theory of money.
Most economic historians who give some weight to monetary forces in european economic history usually employ some variant of the socalled quantity theory of money. Friedman s modern quantity theory proved itself superior to keyness liquidity preference theory because it was more complex, accounting for equities and goods as well as bonds. During his time as professor at the university of chicago, friedman. Although much of his trailblazing work was done on price theory the theory that explains how prices are determined in individual markets friedman is popularly recognized for monetarism. Money demand demand for money quantity theory of money. The quantity theory assumes that t is determined by supplyside forces, which determine the level of real output, and institutional factors. The policy failure of the modern quantity theory of money. It means that the amount of money which people want to have as cash or bank deposits is more or less fixed. Moore, 2009 milton friedman believed that great depression could have been avoided had the government injected sufficient liquidity into the economy. Friedmans modern quantity theory of money explained. Randall wray modern money theory for beginners duration. When there is a change in the supply of money, there is a proportional change in the price level and viceversa. Milton friedman was an american economist and statistician best known for his strong belief in freemarket capitalism.
Quantity theory of money by friedman economics discussion. Displaying friedman s quantity theory of money powerpoint presentations friedman s demand for money md function1 ppt presentation summary. Hello, i have a test on money and banking next week and the only thing its confusing me is friedman s modern quantity theory of money. Modern quantity theories of money toronto economics. The simple quantity theory and the liquidity preference. With george stigler and others, friedman was among the intellectual leaders of the chicago school of economics, a. I read it in the book and i can not see it clear help. In milton friedman s modern quantity theory, what determines the quantity of money demanded. Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. The modern quantity theory is in fact very much a development of the cambridge cash balance formulation of the quantity theory. Since the article was published, his notion of the optimum quantity of money has become one of the most. Contrast the modern quantity theory with the liquidity preference theory.
Friedman on the quantity theory and keynesian economics. Hetzel m ilton friedman died november 16, 2006, at the age of 94. Due to the actions of the monetary authorities, the. Philip cagan, and others, contemporary monetarists continue to expound quantity theory propositions similar to. Describe keyness liquidity preference theory and its improvements. The quantity theory of money takes for granted, first, that the real quantity rather than the nominal quantity of money is what ultimately matters to holders of money and, second, that in any given circumstances people wish to hold a fairly definite real quantity of money.
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