Quantity Theory of Money Essay

Quantity Theory of Money Essay

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Quantity theory of money is a basic topic that one should have general ideas about in order to understand the long run relationship between prices and inflation in macroeconomics class. One of the central implication of the theory basically states that countries which have higher money growth tend to have higher inflation rate. The quantity theory of money has been supported by data from many countries and for different periods of time. A common way would be used in this paper to provide proof for the theory is through computing average inflation, money growth, and real GDP growth from at least 30 countries in a cross section of 10 years or more. If the growth in money velocity is constant, percent of inflation would equal to percent growth in money supply minus percent growth in real GDP. Therefore, testing of the quantity equation would examine whether there is evidence that the quantity equation holds in practice across countries.
Before looking at the data and evidence supporting the quantity theory of money, we will focus on some opponents’ claims about this theory. Opponents of the theory has argued that the theory falls short, as it does not take into consideration the demand for money, simply the supply. The theory assume it is not put in practice under the neoclassical model with zero regulatory interference where supply would be set equal to demand, and prices tend to be sticky in the short run. According to an online article, the president of Argentina’s central bank, Mercedes Marcó del Pont, affirms that it is not true that “printing more money generates inflation” and believes “inflation is rooted in other causes.” As she added to the interview with two pro-government local newspapers Página 12 and Tiempo Argentino,...


... middle of paper ...


... short-run that the increase in money supply does not affect the price. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold. Nevertheless, there are enough data and proof for the relationship between high level of money supply and higher inflation rate in the long- run saying that money supply has a direct relationship with the price level.












Works Cited

Gerlach, Stefan.”Testing the Quantity Theory Using Long-Run Average Cross-Country Data.”
1995. PDF file.
"Printing Money Does Not Lead to Inflation, Argues Argentine Central Bank
President." MercoPress. N.p.,26 Mar. 2012. Web. 02 May 2014. .

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Quantity Theory of Money Essay

- Quantity theory of money is a basic topic that one should have general ideas about in order to understand the long run relationship between prices and inflation in macroeconomics class. One of the central implication of the theory basically states that countries which have higher money growth tend to have higher inflation rate. The quantity theory of money has been supported by data from many countries and for different periods of time. A common way would be used in this paper to provide proof for the theory is through computing average inflation, money growth, and real GDP growth from at least 30 countries in a cross section of 10 years or more....   [tags: Money Growth, Inflation]

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