Friedman reformulated qty theory of money.pptx

Monetary Economics

1. Friedman's Modern Quantity Theory of Money

2. CONTENTS Features of Friedman's Theory Friedman's Demand for Money Function Modern Version of Quantity Theory of Money Significance of Modern Quantity Theory of Money

3. Introduction At Chicago, Milton Friedman, Henry Simons, Lloyd Mints, Frank Knight and Jacob Viner taught and developed ‘a more subtle and relevant version’ of the quantity theory of money in its theoretical form “in which the quantity theory was connected and integrated with general price theory.” The foremost exponent of the Chicago version of the quantity theory of money who led to the so-called “Monetarist Revolution” is Professor Friedman. He, in his essay “The Quantity Theory of Money—A Restatement” published in 1956′, set down a particular model of quantity theory of money.

4. Basic Features of Friedman's Theory Wealth Theory of Demand for Money Forms of Wealth Broader Concept of Money Determinants of Demand for Money General Demand Analysis

5. Friedman's Demand-for-Money M=f(Y,w,P, R b , R e , R c , U) --------------------------- (1) Where, M=aggregate demand for money Y = total flow of income w = ratio of non-human to human wealth P = general price level R b = bond yields, the market bond interest rate R e = equity yields, the market interest rate for equities R c = the expected rate of change of prices of commodities u = utility determined variables which tend to influence tastes and preferences.

6. The demand for money in equation (1) is independent of the normal units used for measuring money variables. It indicates that the amount of money demanded changes proportionately to the changes in the unit in which prices and money income are expressed The equation thus expresses the first degree homogeneous function of P and Y. If price level and money increases to n times their original level, demand for monery also increases to n times in its original quantity Friedman's Demand-for-Money nM = F(nY, w, nP, R b , R e , R c , U)