This document discusses the contributions of several influential economists to the development of the Quantity Theory of Money (QTM) including: Nicolaus Copernicus who first formulated the connection between money supply and price levels; Adam Smith who viewed wealth as determined by commodities not money; Irving Fisher who created the equation of exchange; Alfred Marshall who recognized money as a store of value; A.C. Pigou who modified the equation of exchange; John Maynard Keynes who viewed money as an asset and developed liquidity preference theory; Milton Friedman who believed monetary policy could control inflation and prices; and attributed the Great Depression to monetary policy mistakes.
1) Statement to Quantity Theory of Money
2) Graph illustration and Pictorial description of QTM
3) Different Approaches to QTM
4) Fisher's Transaction Approach Description
5) Assumptions of Fisher's Transaction Approach
6) Conclusion
1) Statement to Quantity Theory of Money
2) Graph illustration and Pictorial description of QTM
3) Different Approaches to QTM
4) Fisher's Transaction Approach Description
5) Assumptions of Fisher's Transaction Approach
6) Conclusion
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Liquidity Preference Theory suggests that investors demand higher interest rates or additional premiums for medium or long-term maturities and investments. Simply put, interest rates directly indicate the price of the money.
https://efinancemanagement.com/investment-decisions/liquidity-preference-theory
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Liquidity Preference Theory suggests that investors demand higher interest rates or additional premiums for medium or long-term maturities and investments. Simply put, interest rates directly indicate the price of the money.
https://efinancemanagement.com/investment-decisions/liquidity-preference-theory
This paper will show the endogenous channel of monetary policy under a Sraffian
context. That is, assuming a distributive variable as exogenous. In this case we say that
the interest rate is determined by constitutional features and is set exogenously by the
central bank to the level that it wants.
In this scheme, banks have a central role. The possibility of extending credit without
the need for prior deposits, makes them a key driver of economic growth. Since the
loan amount is determined by the demand for credit rather than deposits, the concept
of effective demand cannot be dissociated from the analysis.
The implications of monetary and fiscal policy should also not be ignored.
Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy. The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles.
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3. The idea that the money supply will directly
impact both prices and inflation rates,
ceteris paribus
4. Lived from 1473 to 1543
First astronomer to formulate
the Heliocentric Cosmology
Brought monetary reform to
Poland and Prussia through understanding of
connections between money supply and price
levels
Monetae Cudendae Ratio(1526) was written
by request of Sigismund I, King of Poland and
presented to the Prussian Diet describing an
early form of QTM
5. Lived from 1711 to 1776
Scottish philosopher, histo-
rian, and economist
Anti-mercantilist
Wealth was measured by the
stock of commodities of a nation not by the
stock of the money
Of Money(1752) – “It is none of the wheels of
trade: it is the oil which renders the motion
of the wheels more smooth and easy”
6. “If we consider any one kingdom by itself, it
is evident, that the greater or less plenty of
money is of no consequence; since the prices
of commodities are always proportioned to
the plenty of money…”
“Were they to make use of their native
subjects, they would find less advantage
from their superior riches, and from their
great plenty of gold and silver; since the pay
of all their servants must rise in proportion
to the public opulence”
7. Argument that increased in-flow of bullion
into a nation would result in increased
domestic prices, and therefore change terms
of trade between the nations
These increased prices would then result in a
decreased demand for exports and an
increased demand for foreign imports, thus
resulting in the flow of specie out of the
nation
Reversal in terms of trade between nations
8. Lived from 1867 to 1947
American economist, health
campaigner, and eugenicist
Most famous for Fisher
“equation of exchange” put forth in his book
The Purchasing Power of Money(1911)
M V = P T as most simplified version
Where V and T are both assumed constant
Direction of causation from left to right,
showing money supply’s importance
9. Velocity of money is fixed because of
“institutional factors”, i.e. the money supply
being exogenous
Classical dichotomy states that nominal and
real variables can be analyzed separately, so:
Output is determined in real variables,
velocity will remain unchanged because it is
derived from the money supply divided by
price
10. Fisher also assumed that there is no
propensity to hoard and always full
employment
This equation is based on the idea that
money is simply used as a medium of
exchange and not for any speculative or
precautionary purposes
11. Lived from 1842 to 1924
English economist
Father of Cambridge neoclass-
ical approach
Recognized money as a store
of value and not just a medium of exchange
Believed there would always be some
temporary storing of wealth to hedge against
future uncertainties
12. Marshall and fellow neoclassical economists
would focus more on what was happening in
the real world as opposed to idealized
conditions represented by classical
mathematical models
This meant discovering answers to things
such as how people deal with future
uncertainties and the explanation of business
cycles
13. Lived from 1877 to 1959
English neoclassical economist
Prize student of Alfred
Marshall at Cambridge Univ.
Exemplified Marshall’s
Neoclassical approach to economics
Equation of exchange rewritten as
M/P = kY or M/P = (1/V)Y
“k” represents the famous Cambridge
constant
14. Differs from velocity because k has the
ability to fluctuate, while velocity always
remained constant
k relies on things such as the opportunity
cost of holding money and a person’s wealth
15. Lived from 1883 to 1946
British economist, student
of Alfred Marshall at Cambridge
Took different approach to QTM than neo’s
Viewed money not as a commodity, but as an
asset with a price relative to other assets
given by the cost of holding money, which is
the interest rate
Did not believe that changes in the money
supply would lead to a directly proportional
change in the price levels
16. More concerned with the elasticity of prices
in response to changes in aggregate demand
and the behavior of people
His concerns with the actual working
economy led to the development of his
liquidity preference theory, which is the
preference of an individual to hold their
money instead of investing it in things such
as government bonds
17. M/P = L(r,Y)
Represents the amount of liquid cash people
will desire given a certain interest rate and
at a certain income
Keynes viewed money as a close substitute
for other financial assets because these
assets serve as a store of value
“Substitution effect” – interest elasticity of
money demanded varies with respect to the
desire to substitute cash for other financial
assets
18. Precautionary motive – motive for holding
cash due to uncertainty about future rates of
interest
Transactions motive – implies a person will
prefer liquidity to assure they can make
market transactions, mostly determined by a
person’s income
Keynes insight in monetary theory led to a
paradigm shift in the field of economics
19. Lived from 1912 to 2006
American economist,
Statistician, and public
Intellectual
Led the Monetarist incarnation of Chicago
School
Opponent of Keynsian economics and wanted
to show that money mattered
Believed that the money supply was an
important instrument in conducting
economic policies
20. Money is an asset with certain unique
characteristics which cause it to be a
substitute for all assets, both real and
financial
An excess supply of money and excess money
balances would not only be spend on bonds
but on things such as consumer durables
View contends that money demanded in
interest inelastic and therefore the demand
for money will be unresponsive to changes in
the interest rate
21. Main concerns were with the connection
between price movement and changes in the
supply of money, and the relationship
between price changes and changes in output
In the short-run a change in the money
supply would affect output, while in the
long-run, price levels would be changed
Believed monetary policy was key in
controlling price levels and inflation,
promoted a steady, pre-determined fixed
growth rate on the money supply
22. 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
nominal quantity of money in existence”
23. Attributed the cause of the Great Depression
to faulty, tight monetary policy
The Federal Reserve contracted the money
supply, thus creating a financial shock
Had the Fed used easy monetary policy much
of the Great Depression could have been
avoided