Following the publication of Keynes’s the General Theory of Employment, Interest and Money in 1936 economists discarded the traditional quantity theory of money. Some of the criticisms levelled against the theory are discussed as under.Friedman has been criticised for using the broad definition of money which not only includes currency and demand deposits (МSo the overall effect of the rate of interest will be negligible on the demand for money. Keynes, on the other hand, does not make such a distinction.Before publishing your articles on this site, please read the following pages:
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It serves as a medium of exchange. Static theory 6.
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MD is the demand curve for money which changes along with income. Thus money is luxury good. Bonds are defined as claim to a time stream of payments that are fixed in nominal units.3. (b) The price or return from these various assets and Friedman considers five different forms in which wealth can be held, namely, money (M), bonds (B), equities (E), physical non-human goods (G) and human capital (H). It is capitalised income. It is not a theory of output, or of money income, or of the price level.” The demand for money on the part of ultimate wealth holders is formally identical with that of the demand for a consumption service.
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A person who have windfall gain does not deposit the entire amount in the bank but enjoys a whole or part of it in current consumption. 0 From Embeds. Y being the measured income or current income, it may be larger or smaller than his permanent income in any period.
But there is some possibility of substituting human wealth for non-human wealth. Freidman-Savage hypothesis is depicted in the Figure (Fig.12).
According to Freidman-Savage hypothesis, for most people, marginal utility of money income diminishes up to a certain level of money income, it increases from that level to a certain higher level of money income and then beyond that level it again diminishes. Even among the persons with level of permanent income same saving and consumption differ. This equation tells us that in the long period consumption increases in proportion to change in Yp. At OYOn the other hand a movement to the right of point EThe Permanent Income Hypothesis of Friedman is consistent with cross-section budget data.
At higher interest rate the demand for money would be less.
Comment goes here.
The rate of interest and the rate of increase in the price level constitute the cost of holding cash balances.
The present discounted value of these expected income flows from these five forms of wealth constitutes the current value of wealth which can be expressed as:Where W is the current value of total wealth, Y is the total flow of expected income from the five forms of wealth, and r is the interest rate. Your message goes here Money is taken in the broadest sense to include currency, demand deposits and time deposits which yield interest on deposits. Similarly a person who has met with a loss would definitely reduce or postpone his consumption than rush to the bank to withdraw the amount to meet his requirements. He, in his essay “The Quantity Theory of Money—A Restatement” published in 1956′, set down a particular model of quantity theory of money. Milton Friedman, the leading monetarist, is of the view that the quantity theory was not given full chance to fight the great depression 1929-33; there should have been the expansion of credit or money or both. The curve of marginal utility of money income has three segments over LM, (that is, up to income level OYSuppose an individual has an income OA which lies in the first segment of diminishing marginal utility of income. Friedman in his latest empirical study Monetary Trends in the United States and the United Kingdom (1982) gives the following demand function for money for an individual wealth holder with slightly different notations from his original study of 1956 as:Where M is the total stock of money demanded; P is the price level; у is the real income; w is the fraction of wealth in non-human form: RThe demand function for business is roughly similar, although the division of total wealth and human wealth is not very useful since a firm can buy and sell in the market place and hire its human wealth at will.
Therefore, they will try to increase their cash partly by reducing their consumption and partly by selling their assets. With this hypothesis both types of behaviour of buying insurance to avoid risk and of indulging in gambling and thereby to take risks are explained.
The first three items definitely impart an endogenous element to the money supply. But it is not proportional as in the case of price. Thirdly, the usage of terms like ‘permanent, ‘transitory’ and ‘measured’ have tended to affect the clarity of the theory.
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