Scribd
Upload
49 views7 pages

Lecture 16: Friedman's Challenge To Keynes Money Demand and Labour Supply Curve

Friedman challenged Keynes' view of money demand and labor supply. Friedman argued that money demand depends on real income, real interest rates from other assets, and expected inflation. If the money supply increases exogenously and velocity is stable, then nominal GDP will also rise according to the quantity theory of money. Friedman showed empirically that velocity can be stable, unlike Keynes' view that expectations make velocity unpredictable.

Uploaded by

Umesh Chandra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
49 views7 pages

Lecture 16: Friedman's Challenge To Keynes Money Demand and Labour Supply Curve

Friedman challenged Keynes' view of money demand and labor supply. Friedman argued that money demand depends on real income, real interest rates from other assets, and expected inflation. If the money supply increases exogenously and velocity is stable, then nominal GDP will also rise according to the quantity theory of money. Friedman showed empirically that velocity can be stable, unlike Keynes' view that expectations make velocity unpredictable.

Uploaded by

Umesh Chandra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Lecture 16: Friedman’s Challenge to Keynes

Money Demand and Labour Supply Curve

Atulan Guha
Money Demand Function..1
• Money competes for a place in the portfolios of household
and firm with all other assets
– The demand for money is determined by the attractiveness of
holding money relative to that of other assets
– Money balances can be thought of giving their holders utility
and hence entering into the argument of the utility function
– This utility arises from the convenience of holding money to
finance transactions and from the reduction in portfolio risk
– An utility maximising economic unit will hold that quantity of
money which equates the marginal utility of money balances to
the marginal utility foregone by not holding some alternative
assets.
Money Demand Function..2
• By viewing money as consumer’s good, we can obtain a
general form of demand for money function which subsumes
both transaction and asset demand for money
• In this demand for real money depends upon the level of
real income, real interest rate obtained from other assets
and the expected rate of price change

• Where, Md = money demand,


Y = real income,
iB = real rate of interest obtainable from bond
iE = real rate of interest obtainable from equity
P = price
e = denote expected
Money Demand Function…3
• Alternatively, nominal demand for money function can be written
as

• Now velocity of money


• If V increases demand for money declines.
• If we assume that demand for real money balances is
homogeneous of degree zero in money income and prices
• By dividing all the nominal variable by nominal income and leave
the form of relationship unchanged
Money Demand Function…4

Or, desired velocity, Vd depends on real income, real


interest rates and expected rate of price change.

Now, Vd = Y/Md and Va = Y/Ms


So, Vd = Vs, if Ms = Md
If Va < Vd, excess supply of money;
So this excess money will be used for purchasing
other commodities and assets;
Hence, Va will increase.
Money Demand Function…5
• We can write, , Y = y.p

• It will be quantity demand for money, if V is constant, y is at full


employment.
• But if we don’t make these assumptions, it is actually a more
generalised version of Keynesian demand for money
• In Keynesian theory, asset holder expectation about asset price
are thought to be volatile, causing demand for money schedule
with respect to rate of interest to shift. Thus the velocity of
circulation cannot be predicted, i.e. it is not a stable function of
its argument
• But in can be turned into like quantity theory if velocity of
circulation is a stable function of its argument or determinant
• Friedman has shown it empirically .
Money Demand Function…6

• Suppose, the money supply is exogenously


given and money market is in equilibrium
• So,

• The relationship between nominal GDP and


money stock depends upon stability of
velocity of money

You might also like