Chapter 3

Monetary Theories
 Monetary Theory

The study which seeks to discover and

explain how the use of money in its
different functions affect the production,
distribution and consumption of goods.
The Printing Press Cure
 Irving Fisher
Equation of exchange
MV + M’V’ = PT
M =quantity of currency
V= velocity of circulation
M’= quantity of demand deposits
P=average level of prices
T=quantity of goods and services
 Milton Friedman
His political philosophy extolled the virtues of a free market
economic system with minimal intervention. In his 1962
book Capitalism and Freedom, Friedman advocated policies
such as a volunteer military, freely floating exchange rates,
abolition of medical licenses, a negative income tax, and
education vouchers. His ideas concerning monetary policy,
taxation, privatization and deregulation influenced
government policies, especially during the 1980s. His
monetary theory influenced the Federal Reserve's response
to the global financial crisis of 2007–08.
 Demand for Money
1. THE TRANSACTION DEMAND FOR MONEY

2. THE PRECAUTIONARY MOTIVE

3. THE SPECULATIVE MOTIVE

4. THE INFLUENCE OF INTEREST RATES ON

THE DEMAND FOR MONEY