Why is Friedman quantity theory is superior to Keynesian theory?

Friedman’s modern quantity theory proved itself superior to Keynes’s liquidity preference theory because it was more complex, accounting for equities and goods as well as bonds. Friedman allowed the return on money to vary and to increase above zero, making it more realistic than Keynes’s assumption of zero return.

How is Friedman different from Keynes?

Keynes emphasized volatile flows, Friedman emphasized stocks of wealth; a stocks view should imply greater macro stability. Keynes challenged the assumption of gross substitutability, and therefore thought that price and wage flexibility could lead to a downward spiral of falling prices and incomes.

In what way Friedman’s restatement of quantity theory is superior to quantity theory of money?

In Friedman’s restatement of the quantity theory of money, the supply of money is independent of the demand for money. The supply of money is unstable due to the actions of monetary authorities. On the other hand, the demand for money is stable.

Why does Friedman’s view of the demand for money suggest that velocity is predictable?

Finally, unlike the liquidity preference theory, Friedman’s modern quantity theory predicts that interest rate changes should have little effect on money demand. Interest rates did not strongly affect the demand for money, so velocity was predictable and the quantity of money was closely linked to aggregate output.

What is Friedman’s version of the quantity theory of money?

In Friedman’s modern quantity theory of money, the supply of money is independent of demand for money. Due to the actions of the monetary authorities, the supply of money changes, whereas the demand for money remains more or less stable.

Who is right Friedman or Keynes?

Milton Friedman was not the most famous and influential economist in the world — that honour belongs to John Maynard Keynes. But Milton Friedman ran a close second. From one perspective, Milton Friedman was the star pupil of, successor to, and completer of, Keynes’s work.

What factors determine money demand in Friedman’s modern quantity theory how does each affect money demand?

Thus Friedman says there are four factors which determine the demand for money. They are: price level, real income, rate of interest and rate of increase in the price level. The demand for money is unitarily elastic.

What is Friedman demand for money?

Friedman’s theory of demand for money is a wealth theory of demand. In his view, money is a durable consumer good held for the services it renders, and yielding a flow of services proportional to the stock.

Why does an increase in money supply increase aggregate demand?

By increasing the amount of money in the economy, the central bank encourages private consumption. Increasing the money supply also decreases the interest rate, which encourages lending and investment. The increase in consumption and investment leads to a higher aggregate demand.

Why does the Keynesian view of the demand for mon ey suggest that velocity is unpredictable?

In Keynes’s view, a rise in interest rates leads to a lower relative expected return of money and hence a lower demand for money. thought that these expectations moved unpredictably, meaning that money demand and velocity are also unpredictable.

What is Keynes’s criticism of the demand for money?

Keynes’ criticism was directed towards the stability of V (or K or the demand for money). He argued that under conditions of unemploy­ment equilibrium V was highly unstable and would, for the most part, passively adapt to whatever changes independently occurred in money income or the stock of money.

What is the difference between Milton Keynes and Milton Friedman?

First, Friedman uses a broader definition of money than that of Keynes in order to explain his demand for money function. He treats money as an asset or capital good capable of serving as a temporary abode of purchasing power. It is held for the stream of income or consumable services which it renders.

What are the variables noted as U by Friedman?

Such variables are noted as u by Friedman. Broadly, total wealth includes all sources of income or consumable services. It is capitalised income. By income, Friedman means “permanent income” which is the average expected yield on wealth during its life time.

Is the supply of money independent of the demand for money?

If there is change in the interest rate, the long-run demand for money is negligible. In Friedman’s restatement of the quantity theory of money, the supply of money is independent of the demand for money.