Explain The Modern Quantity Theory And Liquidity Theory

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• Discuss the modern quantity theory and the liquidity preference theory.
The Quantity Theory of Money is an economic theory that states that the level of money supply in an economy is directly proportional to the general price level.
In conformity with Wright, R. E., & Quadrini, V. (2009), he states that the modern quantity theory is superior to Keynes’s liquidity preference theory because it is more complicated, specifying three types of assets (bonds, equities, goods) instead of just one (bonds). It also does not assume that the return on money is zero, or even a constant. In Friedman’s theory, velocity is no longer a constant; rather, it is highly predictable and, as in reality and Keynes’s formulation, pro-cyclical, rising during expansions and falling during recessions Friedman, M. (Ed.). (1956). Friedman’s reformulation of the quantity theory delayed well only until the 1970s, …show more content…

In addition to that, not like the liquidity preference theory, Friedman’s modern quantity theory foretell based on observation that interest rate changes should have little effect on money demand. The cause for this is that Friedman believed that the return on bonds, stocks, goods, and money would be positively mutual relations, providing direction to little change in rb – rm, rs – rm, or πe – rm , the fact that both sides would increase or decrease about the same amount. That insight basically lower the modern quantity theory to Md/P = f(Yp (-- removed HTML

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