Routledge Dictionary of Economics, Second Edition
quantity theory of money (E4)
A macroeconomic theory relating the stock of money to the price level. Although discussions of this theory are evident in MERCANTILIST writings (especially in LOCKE), it is to Irving FISHER, PIGOU and Milton FRIEDMAN one looks for twentieth-century expositions. The Fisher or Yale equation is
where T is the total volume of transactions, V is the weighted average velocity of circulation, PY is an index representing the weighted average of prices of the commodities transacted and M is the total quantity of money.
The Cambridge equation, attributed to MARSHALL and PIGOU, is
where M is the total quantity of money, R is the total resources enjoyed by the community, k is the proportion of those resources which the public desires to hold in the form of money and PC is an index number which values resources in terms of consumption goods.
FRIEDMAN revived interest in the theory by expounding it as a theory of demand for real balances.
See also: monetarism
References
Fisher, I. (1911) The Purchasing Power of Money, New York: Macmillan.
Keynes, J.M.
(1923) A Tract on Monetary Reform, London: Macmillan.
Laidler, D. (1991) The Golden Age of the Quantity Theory. The Development of Neoclassical Monetary Economics 1870–1914, Oxford: Philip Alan.
Locke, J. (1823) Some Considerations of the Lowering of Interest and Raising the Value of Money. Collected Works, Vol. V, London (originally published in 1691).
This is the complete article, containing 223 words
(approx. 1 page at 300 words per page).
View More Summaries on Quantity theory of money
