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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 ...
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 same work, Copernicus also formulated an early version of the quantity theory of money, [2] or the relation between a stock of money, its velocity, its price level, and the output of an economy. Like many later classical economists of the 18th and 19th centuries, he focused on the connection between increased money supply and inflation. [6]
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.
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]
Each individual produces some quantity Y, which can be bought for some amount of money M. Individuals use money a given number of times to buy a certain quantity of goods which cost a certain price. In the quantity theory of money , this is expressed as MV = PY , where money supply times velocity equals price times output.
There is some empirical evidence of a direct relationship between the growth of the money supply and long-term price inflation, at least for rapid increases in the amount of money in the economy. [53] The quantity theory was a cornerstone for the monetarists and in particular Milton Friedman, who together with Anna Schwartz in 1963 in a ...
The quantity theory of money dominated macroeconomic theory until the 1930s. Two versions were particularly influential, one developed by Irving Fisher in works that included his 1911 The Purchasing Power of Money and another by Cambridge economists over the course of the early 20th century. [ 13 ]