QUANTITY THEORY OF MONEY AND INFLATION

Quantity Theory of Money and Inflation

Quantity Theory of Money and Inflation

Introduction

It is possible to contend that the theory of money is imbued with a very modern vision and that it, in many ways, prefigures the theories of Keynes. Quantity theory of money, however, can only be fully understood within the general context of value theory. In other words, it is essential to establish an intimate connection between the forms and functions of money expressed as the universal equivalent of exchange value. This theory holds that a single currency in the economy and that its quantity can be known by counting the units of this currency. If a country or territory more than one currency or circulating in the free exchange rate, then the sum of all the current can only arise from the relative value of currencies among themselves. The quantity theory of money is not a generalized expression of monetary theory, only sticks with the case of one currency in circulation. The other problem is that it assumes a stable demand for currency, so their "value added" is relatively constant. However, in a free market where individuals act on their own subjective preferences, the demand for money will not be as steady and stable, but will vary depending on the individuals prefer more or less cash holdings.

It is often stated that the concept of velocity in the quantity theory of money is similar to the concept of effective demand; however, the differences are important. The speed of movement is a magnitude of a statistical nature, which may be relatively constant over long periods of time, but if we understand how the current market and we use the concept of liquidity demand of individuals rather than a speed of the cash. Problems arise when it is submitted that this speed is constant and therefore any change in the amount of currency affects only the price level and in the same proportion in which the amount of circulating modified (Huerta, 2006). It is for this reason it is considered harmful emission of money, a certain percentage increase in the amount of circulating lead to the same percentage growth rate of "price level." However, as we have seen, these theories confuse the problem of inflation. The price level, according to the equation of the Quantity Theory of Money, depends on the amount of current, speed and total volume of goods and services exchanged in the economy.

Huerta de Soto´s criticism

I agree with much of Huerta Soto of what went wrong in the bubble and credit crunch in the analysis. Like him, I have always think that the central bank not the core of the crisis. I found more difficult to agree with his remedy, which the banks rely on assumptions and gold currency completely different structure. Dialogue that include the Austrian school of believers and the United Kingdom to create a new Keynesian and neo-classical economists, barbed wire and some interesting exchanges (Huerta, ...