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Friedman's Re-Statement Of The Quantity Theory Of Money

 Friedman's Re-Statement of the Quantity Theory of Money

Friedman’s Theory

In the reformulation of the volume thesis, Friedman asserts that “the quantity thesis is in the first instance a theory of demand for money. It is not a theory of output or of money income or of the price level.”

The demand for money on the part of maximum prosperity holders is formally identical with that of the demand for a consumption service. He considers the amount of real cash balance (M/P) as a product which is demanded for the reason that it capitulate services to the person who holds it.

Therefore, money is an asset or capital good. Therefore, the demand for money forms part of wealth thesis. For maximum prosperity holders the demand for money in real terms may be expected to be a operation primarily of the succeeding erratic.

  1. Total Affluence

  2. The division of Affluence amidst Human and Non-Human Forms

  3. The anticipated Rates of Return on Money and Other Assets

  4. Other Variables
  1. Total Affluence

    The total prosperity is the analogue of the budget constriction. It is the aggregate that should be divided among diverse forms of assets. In practice, evaluations of total affluence are rarely accessible. In its place, earnings may serve as an index of affluence. Therefore, as per Friedman, earnings are a substitute of prosperity.

  1. The Division of Affluence amidst Human and Non-Human

    The chief source of richness is the productive capability of human beings which is human prosperity. But the argument of human affluence into non-human richness or the contra is subject to establishment constriction. This can be accomplished by using present revenue to buy non-human prosperity or by using non-human wealth to finance the acquisition of skills.

    Therefore, the fraction of aggregate of affluence in the form of non-human prosperity is an extra vita variable. Friedman calls the proportion of non-human to human affluence or the proportion of affluence to earnings as ‘w’.

  1. The Anticipated Rates of Return on Money and Other Assets

    These rates of return are the complements of the prices of a product and its surrogates and counterparts in the thesis of consumer demand. The original rate of return may be zero as it generally is on currency, or negative as it sometimes is on demand deposits, subject to net service charges or positive as it is on demand deposits on which interest is paid and generally on time deposits. The nominal rate of return on other assets comprises of two parts:

    1. Any recently paid acquiesce or cost, such as interest on bonds, dividends on equities and costs of storage on physical assets and

    2. Variations in the prices of these assets which become especially significant under stipulations of inflation or deflation.
  1. Other Variables

    Variables other than earnings may affect the utility attached to the services of money which ascertain liquidity proper. Apart from liquidity, variables are the choices and preferences of affluence possessors. Yet another variable is subsisting capital goods by ultimate prosperity holders.

    These variables also ascertain the demand function for money along with other forms of affluence. Such variables are noted as ‘u’ by Friedman.

    Extensively, total wealth comprises of all sources of earnings or consumable services. It is capitalised earnings. By earnings, Friedman means “permanent earnings” which is an average anticipated acquiesce on affluence during its existence period.

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