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Quantity Theory Of Money

Definition

In monetary economics, the quantity theory of money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.

What is the 'Quantity Theory Of Money'

The quantity theory of money is a theory about the demand for money in an economy. The most common version, sometimes called the "neo-quantity theory" or Fisherian theory, suggests there a mechanical and fixed proportional relationship between changes in the money supply and the general price level. This popular, albeit controversial, formulation of the quantity theory of money is based upon an equation by American economist Irving Fisher.

Explaining 'Quantity Theory Of Money'

The Fisher equation is calculated as:

Where: M represents the money supply.

The Irving Fischer Model

The Fisher model has many strengths, including simplicity and applicability to mathematical models. However, it uses some spurious assumptions to generate its simplicity, including an insistence on proportional increases in the money supply, variable independence and emphasis on price stability.

Competing Quantity Theories

Keynesians more or less use the same framework as monetarists, with few exceptions. John Maynard Keynes rejected the direct relationship between M and P, as he felt it ignored the role of interest rates. Keynes also argued the process of money circulation is complicated and not direct, so individual prices for specific markets adapt differently to changes in the money supply. Keynes believed inflationary policies could help stimulate aggregate demand and boost short-term output to help an economy achieve full employment.


Further Reading


Quantity theory of money
link.springer.com [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

Two illustrations of the quantity theory of money: Breakdowns and revivalsTwo illustrations of the quantity theory of money: Breakdowns and revivals
www.aeaweb.org [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

The quantity theory of moneyThe quantity theory of money
ideas.repec.org [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

Efficient capital markets and the quantity theory of moneyEfficient capital markets and the quantity theory of money
www.jstor.org [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

The price level, the quantity theory of money, and the fiscal theory of the price levelThe price level, the quantity theory of money, and the fiscal theory of the price level
www.nber.org [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

Neisser's unorthodox quantity theory of moneyNeisser's unorthodox quantity theory of money
ideas.repec.org [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

Money supply, economic growth, and the quantity theory of money: France, 1650–1788Money supply, economic growth, and the quantity theory of money: France, 1650–1788
www.sciencedirect.com [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …

EW Kemmerer's contribution to the quantity theory of moneyEW Kemmerer's contribution to the quantity theory of money
www.tandfonline.com [PDF]
… over the definition of 'money', and the lack of unanimity about relevant theoretical criteria, in … Such a change will therefore affect real quantities, V and gy, y' and gy', as … The quantity theory in its cash-balance versions suggests organizing an analysis of monetary phenomena in …



Q&A About Quantity Theory Of Money


Does inflationary policies help stimulate aggregate demand and boost short-term output to help an economy achieve full employment?

Yes, they do .

Why did Keynes reject Fisher's direct relationship between M and P?

Because he felt it ignored the role of interest rates.

What did Keynes argue was more complicated than what Fisher believed?

He argued that circulation process was more complicated than what Fisher believed because individuals adapt differently to changes in the money supply.

What are some strengths of Fisher's equation?

One strength is its simplicity. Another strength is its applicability to mathematical models.

What is the quantity theory of money?

The quantity theory of money is a theory about the demand for money in an economy.

How much does Fisher's equation simplify his model?

It simplifies it by assuming proportional increases in the money supply, variable independence and emphasis on price stability.

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