FEDS Notes: Inflation Expectations in the Recovery From the Great Depression. This was Friedman’s own view, at least as expressed in Milton Friedman’s Monetary Framework. Monetarism is a macroeconomic concept, which states that governments can foster economic stability by targeting the growth rate of money supply. Keynes held that the demand for money is a decreasing function of the rate of interest. On macroeconomics, what does the difference boil down to? Now, Monetarist assume that V remains stable and predictable but not constant. In short, by pumping extra money into the system (as the Keynesians were prone to doing) governments would drive up inflation, risking major economic pain. The distinction between Keynesian and monetarists positions is a bit more blurred. Follow @atabarrok, Tyler Cowen Getting into our second year of economics, are we? Keynesian, Monetarist Theories in Politics, Everything You Need to Know About Macroeconomics. If both types of economists were equated to motorists, monetarists would be most concerned with adding gasoline to their tanks, while Keynesians would be most concerned with keeping their motors running. The supply of money is considered to be fixed in the short run by monetary authorities. Friedman thought that the liquidity premium on money was unlikely to keep interest "too high"; for Friedman the interest rate is determined solely in the loanable funds market by time preference and productivity, a’la Irving Fisher. The reason is that with the demand function for money (and so also V) of Friedman’s specification, even if we assume the supply of money to be autonomously given, the equilibrium equation of modern QTM will read as Y = V(Y, w, rm, rb, re, pe, u).M. (12.16). Basically the difference lies in the way each of them treat the component velocity of the money (V) in the quantity equation of money which is MV = PQ. He implied it is up to the Federal Reserve to regulate the economy., Presidents and other lawmakers have applied multiple economic theories throughout history. On the other, Friedman advocated a greater efficacy of the monetary against the fiscal policy on the basis of his studies on the consumption function (cf. General Demand Analysis: The Cambridge approach is preferred by the economists because it applies the general demand analysis to the special case of money. Thus the modern quantity theories like Friedman draw a distinction between demand for money and demand function for money or between velocity of money and velocity of money function. International Monetary Fund. Key Takeaways. For Keynes the demand for investment was inherently unstable, for "beauty contest" reasons. 21, 2020. Friedman won the battle, and monetary policy was accepted by most economists as a money supply matter. He says that while velocity of money may and does fluctuate, the velocity function is stable. Friedman rejected that characterization outright. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Quantity Theory of Money - Cambridge Version: The economists of Cambridge University such as Mr. Robertson, Mr. Pigou, Mr. Marshall and Mr. Keynes introduced a new version of the quantity Theory of Money. Imagine adding more money to the current economy and the effects it would have on business expectations and the production of goods. According to Milton Friedman, demand for real money balances (M d /P) is directly related to permanent income (Y p)—the discounted present value of expected future income—and indirectly related to the expected differential returns from bonds, stocks (equities), and goods vis-à-vis money (r b − r m, r s − r m, π e − r m), where inflation (π) proxies the return on goods. Accessed Mar. 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