Page 136 - DECO402_Macro Economics

Tanima Dutta, Lovely Professional University Unit-15: Restatement of Friedman’s Quantity Theory of Money

Unit-15: Restatement of Friedman’s Quantity Theory of Notes

Money

Contents
Objectives
Introduction
15.1 Friedman’s Theory
15.2 Empirical Evidence of Friedman’s Theory
15.3 Friedman Vs Keynes
15.4 Summary
15.5 Keywords
15.6 Review Questions
15.7 Further Readings

Objectives
After studying this unit, students will be able to:

y Know Friedman’s Theory,
y Know Empirical Evidence of Friedman’s Theory.

Introduction

After publishing Keynes book ‘General Theory of Employment, Interest and Money’ in 1936 AD, Economists
cancelled the traditional Quantity Theory of Money. But in Chicago University “The Quantity Theory
of Money was a central and strong part of verbal tradition in the decades of 1930 and 1940.” Friedman,
Simanz, Loyed Mints, Frank Knight and Jacob Winer were teaching in Chicago University and they
developed such and subtle and relevant version of Quantity Theory of Money in theoretical form “In
which Quantity Theory of Money was related and combined with General Price Theory.” The very
first explainer of the Chicago version of Quantity Theory of Money is Prof. Friedman who presented
alleged Monetarist revolution. He made a special model of Modern Quantity Theory of Money in
his essay titled as ‘The Quantity Theory of Money: A Restatement’. Following analysis is shown of
that model.

15.1 Friedman’s Theory

In the Restatement of Quantity Theory of Money Friedman has forced that “The Quantity Theory is in
the first instance a theory of the demand for money. It is not a theory of output, or of money income,
or of the price level.” Money demand from the side of asset holders is formally equal with the demand
of a consuming service. He considers the amount of actual cash remaining M/P as a thing which is
demanded, because it delivers the services to that person who holds it. Therefore, money is an asset
or capital goods. So meney demand is a part of capital or asset theory.

LOVELY PROFESSIONAL UNIVERSITY 129