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Revised: 28 September 2009. Most economic historians who give some weight to monetary forces in European economic history usually employ some variant of the so-called Quantity Theory of Money.
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A theory of change is a purposeful model of how an initiative—such as a policy, a strategy, a program, or a project—contributes through a chain of early and intermediate outcomes to the...
- MsV = P T ,
- 7.4 The Cambridge Cash Balance Equation
- 7.5 The Keynesian Approach
- 7.6 Friedman’s Modern Quantity Theory
- Md
- Md
- M/P Φ(Yp)
where Ms is the actual stock of money, V its transactions velocity of circulation (or more simply velocity — the average number of times per period that the stock of money changes hands to finance transactions), P is the price level, and T is the volume of transactions. The equation of exchange states that the quantity of money multiplied by the av...
somewhat different approach within the quantity theory tradition was taken by the neoclassical economists in Cambridge University, Eng-land.3 In contrast to the classical macroeconomic approach, the Cam-bridge economists took a microeconomic approach, by asking what de-termines the amount of money an economic agent would wish to hold. The emphasis ...
Although the Cambridge economists raised to a position of importance variables such as interest rates and wealth, they did not explicitly in-clude these variables in their money demand function. It is, however, from this tradition of approaching the subject of money demand that their successor Keynes developed his analysis in his famous 1936 book, ...
The Keynesian theory of liquidity preference draws a distinction be-tween transactions, precautionary, and speculative demands for money. Friedman (1956), however, by assuming that money is abstract purchas-ing power, meaning that people hold it with the intention of using it for upcoming purchases of goods and services, integrated an asset theory ...
✪ = Φ(Yp, Rb Rm, Re Rm, πe Rm, ), (7.6) P − − − · · · where Yp = real permanent income Rb = expected nominal rate of return on bonds Re = expected nominal rate of return on equities Rm = expected nominal rate of return on money, and πe = expected inflation rate. The dots in equation (7.6) stand for other variables (such as, for ex-ample, the ...
✪ = Φ(Yp), P which indicates that real permanent income is the only determinant of real money demand. The second issue Friedman stressed is the stability of the money de-mand function. In particular, unlike Keynes (who felt that the demand for money is erratic and shifts with changed expectations of the rate of interest), Friedman suggested that th...
which suggests that since the relationship between current income, Y , and permanent income, Yp, is usually quite predictable, the velocity of money is predictable (although not constant) as well. This means that a given change in the nominal money supply will produce a predictable change in aggregate spending. Therefore, Friedman’s theory of the d...
- Apostolos Serletis
- 2001
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research. Volume Title: A Theory of the Consumption Function. Volume Author/Editor: Milton Friedman. Volume Publisher: Princeton University Press. Volume ISBN: 0-691-04182-2. Volume URL: http://www.nber.org/books/frie57-1.
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This chapter discusses Friedman’s theory of the consumption function and its companion permanent income hypothesis, which together are the basis for all modern formulations of the household choice problem.
Feb 1, 2007 · Abstract. In overlapping generations models, money growth creates intergenerational wealth effects and leads to the breakdown of the Friedman rule; the rule can be restored via lump-sum tax and...
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the validity of Friedman’s observations. Yes, the velocity of money changed in this long period of time, but the change in velocity did “proceed slowly”, just as Friedman would have expected. Moreover, it was trivial relative to the much larger movements in both money and national income. Money went up over 140 times and
