This theory assumes that the fundamental determinant of the price level is the quantity of money. In other words, the total amount of money expenditures of buyers is equal to the total amount of money receipts of sellers. Share Your PDF File But these principles in the Quantity Theory are not in accord with facts, changes in money supply and price level depends upon some more fundamental factors such as income, expenditure, saving and investment. Further, whereas M refers to a point of time, V refers to the velocity of money over period, MV involves the error of multiplying mutually inconsistent and non-comparable factors. The theory assumes that other things like V, V’, M’ and T remain constant. The theory fails to establish the causal relationship between P and M. The theory does explain why the price level is what it is at any particular time, it does not explain the causes which bring about changes in the price level. Besides, quantity theory of money has been criticized by various monetary experts on different grounds. The theory assumes that other things like V, V’, M’ and T remain constant. 260-271. The main criticisms levelled against Friedman’s analysis are: 1. April 13, 2009. According to Prof. Crowther, “the most we can say for the quantity theory is that the quantity of money in existence seems to be the dominant influence on the price level on the average of long period. Money was considered a veil and played passive role, only as a translator of the values of commodities in terms of money. Section 412 of Indian Penal Code, 1860 – Explained! It applies under conditions where things remain constant but ours is a dynamic world, where things are fast changing. I maintain that the Federal Reserve banks are not creating money out of the thin air. But if there is no full employment and if there are unemployed resources, changes in M are likely to produce changes both in money income and real income. Chapter 6 The Quantity Theory of Money Frank Hayes In this essay I wish to consider the quantity theory analysis and to extend this into a discussion of the major policy approaches to economic stabilization. Moreover, important instruments of credit control like bank rate and open market operations are based on the presumption that a large supply of money leads to higher prices. If it is a decline in the quantity of money that causes a depression, an increase in it should be sufficient to cause an upturn but there are many examples, which go to prove its fallacy, as an increase in the supply of money at the bottom of a slump ‘did not raise the prices. Before publishing your Essay on this site, please read the following pages: 1. The quantity theory of money takes for granted, first, that the real quantity rather than the nominal quantity of money is what ultimately matters to holders of money and, second, that in any given circumstances people wish to hold a fairly definite real quantity of money. Independent Variables :-In this equation it has been assumed that M,V and T are independent variables while it is not true. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. The quantity MV = PT is more truism, an obvious fact. (d) The price level (P) far from being entirely passive, may contribute to changes in other factors. 20, Issue. This reformulated quantity theory of money is illustrated in Figure 1 (A) and (B) where OTC is the output curve relating to the quantity of money and PRC is the price curve relating to the quantity of money. Online course. The quantity theory of money depends on the simple fact that if people will be having more money then they will want to spend more and that means more people will bid for the same goods/services and that will cause the price to shoot up. The validity of the theory depends upon the existence of full employment, which is very difficult to attain in actual practice. The European Journal of the History of Economic Thought, Vol. Mastering A-Level Economics Quantitative Skills. The prosperity of the 1920s in the USA shows that a rise in T can lead to a rise in M without causing any change in P. The fact of the matter is that these variables are not independent of one another as Fisher has assumed. The “Cambridge” critique of the quantity theory of money: A note on how quantitative easing vindicates it. Share Your Essays.com is the home of thousands of essays published by experts like you! We have to note that M refers to a point of time. Share Your Word File TOS4. In fact I'd like to see this section a expanded a bit (not too much though). Welcome to Shareyouressays.com! Our mission is to provide an online platform to help students to discuss anything and everything about Essay. Similarly, there are circumstances when M has increased without an increase in P or the increase in P is not in direct proportion to an increase in M. Thus, the quantity theory has been found, at times, to be inconsistent with actual facts. Keynes upheld the store of value function of money and laid great stress on the speculative motive for holding money as against the classical emphasis on the transaction and precautionary motives for holding money. 5. ” Prof. Halm expressed the view that the importance of the equation should by no means be overrated: otherwise, we are bound to get into difficulties. 10. Further evidences of the onset of Great Depression II. The quantity theory of money as stated by Prof. Fisher is based on unreal assumptions like the existence of full employment of resources and stability of expenditure. the real task of such a theory is to treat the problem dynamically, analysing the different elements…as to exhibit the causal process by which the price level is determined………. 6. In actual practice other things keep on changing in the short period as well as in the long period. Fisher’s theory explains the relationship between the money supply and price level. It is, however, to be realized that under dynamic conditions money has an active role to play, and therefore, the theory of prices must form an integral part of the theory of output, employment and money (monetary theory) and should not remain isolated as in the classical version.
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