Question

1. Give a brief history of the "quantity theory of money".

2.In a couple sentences, in your own words, what does the QTM mean?

3. Milton Friedman, a famous Monetarist economist, is quoted as saying "Inflation is always and everywhere a monetary phenomenon"...what does this mean? Under this view, what is responsible for inflation?

Answer 1

1. The quantity theory of money was a classical theory developed by the major classical economists such as J.S. Mill, David Hume, Irving Fisher in the late 19th and early 20th century. This theory was based on the idea that money supply directly affects the level of prices of goods and services. That is to say, money in general had only nominal impact through increasing prices but money supply doesn't have any impact on real variables of the economy such as output, employment, investment, etc.

This theory was highly criticized by Keynes, WIcksell and Ludwig von Mises.