# Quantity Theory of Money

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“The hallmark of classical macroeconomic theory is the separation of real and nominal variables. This classical dichotomy enables us to examine the behavior or the real variables in the economic in the economic system while ignoring the nominal variables. In the stylized classical model we have developed, the quantity of money is irrelevant for the determination of the real variables. Long-run money neutrality is a crucial property of the classical model.” (Snowden 2005 p. 50)

"What is commonly known as the quantity theory of money is more descriptively called the quantiy-of-money theory of the price level." (Snowden 2005 p. 483)

### Cambridge EquationEdit

$Md=kPY$

k = desired currency holding = 1/Velocity

Md = money demand

### Fisher EquationEdit

$MV=PY$

• $V$ = income velocity of the circulation of money

George Mason economist Tyler Cowen gave eight assumptions to the Quantity Theory of Money:

1. Sustained inflation is always driven by M

2. Real (MD) vs Nominal (MS) money supply

3. MD = f(wealth, rate of return, value of liquidity , transition to technology)

4. MD is stable

5. Emphasis the long run no injection effects

6. r determined by real factors – time preference/productivity of K

7. MS is usefully exogenous

8. PPP unit of account shouldn’t matter

He stated that 1 - 7 are true, and he doesn't know why eight isn't. He also gave four critisisms.

1. Neil Wallace – not foundationalist enough, take things as common sense/model why people hold money/there is a 30 year literature for micro foundations for QTM

2. Keynes – v is elastic/don’t worry about M – no one holds to this

3. Austrians – QTM neglects injection effects

4. Money supply endogenous – just another commodity in economy

## SourcesEdit

1. Snowdon, Brian and Howard R. Vane. 2005: Edward Elgar Publishing;Modern Macroeconomics: Its Origins, Development And Current State