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Jump to: navigation, search In monetary economics, the quantity theory of money is a theory emphasizing the positive relationship of overall prices or the nominal value of expenditures to the quantity of money. It is the mainstream economic theory of the price level. Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Contents
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1 Origins and development of the quantity theory 2 Equation of exchange o 2.1 A rudimentary theory 3 Quantity theory and evidence o 3.1 Principles o 3.2 Decline of money-supply targeting 4 Criticism 5 References 6 See also o 6.1 Alternative theories 7 External links
silver as the money itself contains []. The solution is to mint no more coinage until it recovers its par value.[10]
amounts to a statement of the theory,[11] while other economic historians date the discovery later, to figures such as Jean Bodin, David Hume, and John Stuart Mill.[12][10] Historically, the main rival of the quantity theory was the real bills doctrine, which says that the issue of money does not raise prices, as long as the new money is issued in exchange for assets of sufficient value.[13]
PT is the price level associated with transactions for the economy during the period T is an index of the real value of aggregate transactions.
The previous equation presents the difficulty that the associated data are not available for all transactions. With the development of national income and product accounts, emphasis shifted to national-income or final-product transactions, rather than gross transactions. Economists may therefore work with the form where
V is the velocity of money in final expenditures. Q is an index of the real value of final expenditures.
As an example, M might represent currency plus deposits in checking and savings accounts held by the public, Q real output with P the corresponding price level, and the nominal (money)
value of output. In one empirical formulation, velocity was taken to be the ratio of net national product in current prices to the money stock.[14] Thus far, the theory is not particularly controversial. But there are questions of the extent to which each of these variables is dependent upon the others. Without further restrictions, it does require that change in the money supply would change the value of any or all of P, Q, or . For example, a 10% increase in M could be accompanied by a 10% decrease in V, leaving PQ unchanged.
t is time.
That is to say that, if V and Q were constant, then the inflation rate would exactly equal the growth rate of the money supply.
[edit] Principles
The theory above is based on the following hypotheses:
1. The source of inflation is fundamentally derived from the growth rate of the money
supply.
2. The supply of money is exogenous. 3. The demand for money, as reflected in its velocity, is a stable function of nominal
income, interest rates, and so forth. 4. The mechanism for injecting money into the economy is not that important in the long run. 5. The real interest rate is determined by non-monetary factors: (productivity of capital, time preference).
[edit] Criticism
The theory attracted criticism from John Maynard Keynes, particularly in his work General Theory.[20][clarification