Page 141 - DECO402_Macro Economics

Macroeconomic Theory

Notes 15.2 Empirical Evidence of Friedman’s Theory
Many Empirical studies related with Money Theory of Friedman have done in Chicago and other
universities, in which some of them are highlighted below:
The modern theory of money forces on demand of money. Demand of money is the assets which
depends on many variables and generally it is constant. Friedman himself and other economists of
Chicago especially Saldon have empirically experimented in this relation. According to it the variables
on which demand of money depends the evidences of those effect are following:
1. In relation with income Friedman found that there is very high leveled correlation in the
long term changes of money-stock per capita and actual income per capita. But flexibility of
money-demand for the changes in per capita income is more than unit. Friedman found about
America that this flexibility is 1.8 from which he concluded that this behavior of demand of
actual remaining is similar as the behaviour of demand of luxury goods.
2. Friedman’s study tells about the circular behaviour of income that in the expansion of
economy the actual stock of money and actual income both increase, and decrease in
contraction, but the rank of change in actual stock is lesser instead of actual income. This
means that the ratio of income velocity of money to money stock of income, increase in
expansion stage, and decreases in contraction stage.
3. The cost of holding money, i.e., related to interest rate Friedman on the basis of empirical
evidence concluded that interest rates definitely affects the demand of money but this effect
is not heavy in size. Second, no agreement on that are short term or long term interest rates
related with intimacy with demand of money. But this evidence is clear that in the form of
absolute price there is lesser flexibility in short term instead of long term. Third, approximately
all the estimations, whether they are related with long term or short term rates, show lesser
flexibility than unit in absolute price. The last, the change in actual income instead of changes
in interest rates, are found the most important reasons of changes in demand of money.

Task Express your views about Friedman theory.

Self Assessment
Multiple Choice Questions:
3. The main source of wealth in …………………. capacity of humans.
(a) productive (b) editorial
(c) financial (d) none Of These
4. Income can do the …………… of indicator of wealth.
(a) rebel (b) work
(c) plan (d) none of these
5. The printed rate of return can be ………………. .
(a) zero (b) lesser
(c) more (d) none of these

134 LOVELY PROFESSIONAL UNIVERSITY