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

6. Except liquidity the preferences and interests of asset holders are ………………. . Notes
(a) Invariable (b) Variable
(c) Good variable (d) None of these.

15.3 Friedman Vs Keynes

The demand function of money of Friedman is different from Keynes from many ways which is
discussed following:
1. In comparison to Keynes, Friedman uses a descriptive definition of money for explaining
the demand function of money. He considers money as an asset or capital good which has
the capacity to work of a temporary residence of purchasing power. It is held for delivering
the income outflow and consumable services. On the other side, in the Keynes definition of
money, demand deposits and government interest-free credits are included.
2. Friedman produces such demand function of money which is absolutely different from
Keynes. According to that, demand of money towards the asset holders is a multivariable
function. These are—R —yield on money; R – yields on Bonds; R – yield on securities ;
b
m
e
g – yield on physical assets; and μ (Mu) showing other variables. In Keynes Theory, the
p
demand of money in the form of assets in limited till bonds, where interest rates are the
relative costs of money holding.
3. There is also difference in money instrumentation of Keynes and Friedman how changes
in money affects the financial action? According to Keynes, monetary changes by bond
prices and interest rates affect the financial action indirectly. Monetary officials increase the
money supply on purchasing the bonds which increases their prices and reduces the yield
on them. On the other side, the monetary changes in Friedman’s Theory affect the prices
and productions of all typed commodities directly and straightly. Because people will sell
and buy any assets they have. Friedman focuses on the thing that the market interest rates
are smaller parts of total spectrum of those rates with which these are related.
4. There is also the difference about the aims of holding the money remaining in both the
approaches. Keynes divides money remaining in ‘active’ and ‘inactive’ series. In first
transaction and caution objective are included and in second, the speculative objective of
money holding. On the other side, Friedman doesn’t do any such division in money remaining.
According to him money is held for many different objectives which money determines the
total quantity of physical assets, total asset human asset and securities like general preference,
interests and expectations.
5. Friedman explains his theory by permanent income and nominal income in his analysis.
Permanent income is that which quantity a asset holder consumes. On keeping his asset
as entire for some time. Nominal income is measured in the current units of currency. It
depends on the quantity and price both of trading commodities. On the other side, Keynes
doesn’t show any such difference.

Self Assessment

State whether the following statements are True or False:
7. The interest flexibility of long term demand function of money is negligible.
8. The demand function of trade is approximately same.
9. Friedman considered money as constant.
10. The supply of money is mostly exogenous.

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