22-11-2012, 11:41 AM
Friedman’s Restatement of Quantity theory of Money
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Milton Friedman (1912 – 2006)
Professor of the University of Chicago
Awarded nobel prize in Economics in 1976
a Marshallian and became almost synonymous with monetarism in modern economics
Friedman’s restatement of QTM
Acc to Friedman ;
QTM is primarily a theory of demand for
money.
Depends on 4 factors :
The general price level
The magnitude of real income
The current rate of interest
The rate of increase in the general price level
The relation of ‘Demand for money’ to the factors is as follows:
Direct and proportional relation to change in general price level.
Direct and more than proportional relation to changes in real income
Inverse relationship with rate of interest and rate of increase of price level.
Determination of nominal income: Friedman’s approach
Friedman’s demand function for money:
Md = k (rb , re , rd )PY
Friedman made strong assumptions about behaviour of k.
He converted his money demand fn into a theory of nominal income by assuming that variables other than nominal income (PY) have little influence on k.
With this assumption money held as a proportion of income is nearly constant
Criticisms
Criticized on 2 grounds :
Friedman argued that rate of interest did not play a crucial role in determining demand for money.
He assumed that the supply of money was independent of changes in income and price levels
Conclusion
Friedman’s QTM marks an improvement over the traditional QTM as it furnishes a more penetrating and detailed analysis.
He actually tested the validity of his theoretical formulations through empirical research.
Thus he tried to establish that “Inflation is always and everywhere a monetary phenomenon!!!”