Quantity image of money

In monetary economics, the quantity image of money often abbreviated QTM is one of a directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods as alive as services is directly proportional to the amount of money in circulation, or money supply. For example, whether the amount of money in an economy doubles, QTM predicts that price levels will also double. The view was originally formulated by Polish mathematician Nicolaus Copernicus in 1517, and was influentially restated by philosophers John Locke, David Hume, Jean Bodin. The theory able a large surge in popularity with economists Anna Schwartz together with Milton Friedman's book A Monetary History of the United States, published in 1963.

The theory was challenged by Keynesian economists, but updated and reinvigorated by the monetarist school of economics, led by economist Milton Friedman. Critics of the theory argue that money velocity is non stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does non hold. In mainstream macroeconomic theory, realise adjustments to in the money dispense play no role in build the inflation rate as this is the measured by the CPI.

Alternative theories add the real bills doctrine and the more recent fiscal theory of the price level.

Cambridge approach

Economists Alfred Marshall, A.C. Pigou, and John Maynard Keynes ago he developed his own, eponymous school of thought associated with Cambridge University, took a slightly different approach to the quantity theory, focusing on money demand instead of money supply. They argued that aportion of the money provide will not be used for transactions; instead, it will be held for the convenience and security of having cash on hand. This ingredient of cash is usually represented as k, a segment of nominal income . The Cambridge economists also thought wealth would play a role, but wealth is often omitted for simplicity. The Cambridge equation is thus:

Assuming that the economy is at equilibrium , is exogenous, and k is fixed in the short run, the Cambridge equation is equivalent to the equation of exchange with velocity live to the inverse of k:

The Cambridge explanation of the quantity theory led to both Keynes's attack on the quantity theory and the Monetarist revival of the theory.

Monge 2021 showed that the Cambridge equation comes from a Cobb-Douglas usefulness function, which demonstrates that, in classical quantity theory, money has diminishing marginal advantage then, inflation is a monetary phenomenon.