Explain Friedman’s modern quantity theory ofmoney.
Answers
In this article we will discuss about the quantity theory of money by Friedman.
Friedman in his essay, “The Quantity Theory of Money—A Restatement” published in 1956 beautifully restated the old quantity theory of money. In his restatement he says that “money does matter”. For a better understanding and appreciation of Friedman’s modern quantity theory, it is necessary to state the major assumptions and beliefs of Friedman.
First of all Friedman says that his quantity theory is a theory of demand for money and not a theory of output, income or prices.
Secondly, Friedman distinguishes between two types of demand for money. In the first type, money is demanded for transaction purposes. It serves as a medium of exchange. This view of money is the same as the old quantity theory. But in the second type, money is demanded because it is considered as an asset. Money is more basic than the medium of exchange. It is a temporary abode of purchasing power and hence an asset or a part of wealth. Friedman treats the demand for money as a part of the wealth theory.
Thirdly, Friedman treats the demand for money just like the demand for any durable consumer good