Page 138 - DECO402_Macro Economics

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

3. Equities: Equities are defined as the form of claims of stream at the time of payment, which Notes
is constant in actual units.
4. Physical goods or Non-human goods: These are inventories of consumer and durabul
consuming goods.
5. Human capital : Human-Capital is the production capacity of Humans.
So every form of assets have its unique quality and different return either in the form of explicitly
interest, dividend, labour, income etc. or in the form of services of money measured in inexplicitly
price level and inventories. The current price of present discounted price assets of these expected
income flows is made from these five forms of wealth, which can be expressed as following—
W = Y/r
Where W is the current price of total assets, Y is the total flow of expected incomes from five forms of
assets, and r is the interest rate. This equation shows that assets is capitalized income.

Did You Know? Total asset is the identical of budget constraint.

Demand Function of Money

Friedman demonstrates the demand function of money of a personal asset holder by use of following
symbols in his new experimental study ‘Monetary Trends in the United States and the United Kingdom
(1982)’ somewhat different from his 1956 fundamental study:
M/P = f (Y W, R , R , R , g , µ)
b
e
m
p
Where W is the total stock of demanded money; P is the price level; Y is the actual income; W is the
part of asset in the non-human form; R is the rate of expected money form; R is the rate of expected
b
m
rate of return on the bonds in which the expected change in their prices are included; R is the rate of
e
expected rate of return on the equities in which the expected change in their prices are included; g =
p
(1/P)(dP/dt) is the expected rate of the changes in prices of commodity and so is the rate of expected
nominal return on physical assets; µ (Mu) is for other variables except income which can affected the
importance related to services of money as interests, preferences etc.
The demand function of trade is approximately same. Though the division in total asset and human
asset is not very beneficial, because one firm can sell and purchase in the market and give it’s human
asset on rent on it’s own wish. But other components are important. The total demand function of
money is the addition of personal demand functions in which M and Y respectively show the holding
money per capita and income per capita and W shows the asset in non-human form.
The demand function of money reaches on this result that on increment in expected yields (Returns)
of different assets, the demand of money of a holder decreases, and the demand of money increases
on increment in asset. Income is adjusted with which cash remaining, that is the long timed expected
level of income, not the yielding current income. The empirical proof tells that the income flexibility
of money-demand is more than unit, which means that the income velocity is felling down in long
time. It means that the prolonged demand function of money is constant. In other words, the interest
flexibility of prolonged demand function of money is negligible.
The money supply is independent from demand of money in the Friedman's Restatement of Quantity
Theory of Money Friedman. The supply of money is temporary because of works of money holders.
On the other side, the demand of money is constant. It means that money, which the people want to

LOVELY PROFESSIONAL UNIVERSITY 131