On account of the expansion of the supply of money, interest rates may fall but investment will not rise unless the marginal efficiency of capital is revived. The Quantity Theory of Money (QTM) is one of the classical macroeconomic models that explain the linkage between money and prices. Producers are … Any change in the quantity of money produces an exactly proportionate change in the price level. In the following article by Elliott Wave International we are going to look further at the Quantity Theory of Money. A Critique of the Quantity Theory of Money. At the end I will discuss a bit more about the Velocity of money.~ Tim McMahon, editor. In his theory of demand for money, Fisher attached emphasis on the use of money as a medium of exchange. When the money supply changes, there is a proportional change in price levels, and when price levels change, the money supply changes by the same proportion. Among the many insights Rothbard provides, we find a compelling and cogent refutation of Irving Fisher’s equation of exchange (in section 13)—which underlies the monetarist quantity theory of money. It is supported and calculated by using the Fisher Equation on Quantity Theory of Money. In other words, money is demanded for transaction purposes. This article investigates whether the quantity theory of money is still alive. We demonstrate three insights. ADVERTISEMENTS: Read this article to learn about the fisher’s quantity theory of money and assumptions! Article Information; Abstract By extending his data, we document the instability of low-frequency regression coefficients that Lucas (1980) used to express the quantity theory of money. We impute the differences in these regression coefficients to differences in monetary policies across periods. Whereas Simon Newcomb formulated the equation of exchange, he rejected the causality and the proportionality postulates of the quantity theory in some cases. Here’s our challenge. The theory holds that to effectuate revival, investment must exceed saving. Thus, the strategic variable is investment and not the quantity of money. The quantity theory of money states that the quantity of money is the main determinant of the price level or the value of money. In chapter 11 of Man, Economy, and State [1962] (2009), Rothbard sets out his theory of money and its influences on business fluctuations. Deflation Basics Series: The Quantity Theory of Money By Elliott Wave International. […] Quantity Theory of Money— Fisher’s Version: Like the price of a commodity, value of money is determinded by the supply of money and demand for money. In my previous paper The Revisionist Theory and History of Depressions I argued that persistently falling interest rates cause an erosion of capital, unseen but nonetheless lethal. Antal E. Fekete. First, for countries with low inflation, the raw relationship between average inflation and the growth rate of money is tenuous at best. April 13, 2009. In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.For example, if the amount of money in an economy doubles, QTM predicts that price levels will also double. The quantity theory of money states that in an economy, the money supply and price levels are in direct proportion to one another. Quantity Theory of Money The approach of classical economists toward money states that the amount of money available in the economy is determined by the equation of exchange: Definition: Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another.When there is a change in the supply of money, there is a proportional change in the price level and vice-versa.