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The quantity theory of money (often abbreviated QTM) is a hypothesis within monetary economics which states that the general price level of goods and services is directly proportional to the amount of money in circulation (i.e., the money supply), and that the causality runs from money to prices. This implies that the theory potentially ...
The Cambridge equation formally represents the Cambridge cash-balance theory, an alternative approach to the classical quantity theory of money. Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of goods produced , the price level , amounts of money, and how money moves.
The period when major central banks focused on targeting the growth of money supply, reflecting monetarist theory, lasted only for a few years, in the US from 1979 to 1982. [16] The money supply is useful as a policy target only if the relationship between money and nominal GDP, and therefore inflation, is stable and predictable.
That is to say that, if and were constant or growing at equal fixed rates, then the inflation rate would exactly equal the growth rate of the money supply. An opponent of the quantity theory would not be bound to reject the equation of exchange, but could instead postulate offsetting responses (direct or indirect) of or of to /.
In the quantity theory of money, this is expressed as MV = PY, where money supply times velocity equals price times output. Lucas then introduced variation in the price level. This can occur through changes in the local price level of individual islands due to increased or decreased demand (i.e. asymmetric preferences, z) or through stochastic ...
Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions ( as medium of exchange, store of value, and unit of account), and it considers how money can gain acceptance purely because of its convenience as a public good. [1]
His major contributions related to the quantity theory and the trade cycle. [7] He was one of the first English economists to stress the primacy of credit money rather than metallic legal tender. Furthermore, his income-based approach led to a closer integration of the theories of money and output.
According to the quantity theory supported by the monetarist school of thought, there is a tight causal connection between growth in the money supply and inflation. In particular during the 1970s and 1980s this idea was influential, and several major central banks during that period attempted to control the money supply closely, following a ...