What Is The Criticism On The Quantity Theory Of Money?

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What Is The Criticism On The Quantity Theory Of Money?

3 Answers

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Answer 1

One of the main criticisms is the assumption of other things being constant, though other things do not remain constant only this fact is not enough to reject the theory. All other scientific theories are based on the assumption that other things remain equal. To this objection of the critic's professor Fisher has pointed out that the variations in long run they remain more or less constant.

Secondly, it has urged that the effect of a change in the quantity of money is not simply proportionate change in the price level. Only under exceptional cases, doubling of the quantity of money will double the price level.

Thirdly, the theory is also inadequate to explain the process through which changes in the
quantity of money effect the price level
.
Fourthly, a large majority of transactions taking place through money are industrial, commercial, and financial. Only a small proportion of them is commodity transaction, which are represented by the volume of trade. The theory thus measure not the purchasing power of money, but the cash transaction method
Finally, the theory is quite inadequate o explain the change in price level which occur during a trade cycle.In spite of the above criticism the theory is not entirely useless.

Answer 2

Anonymous answered

Fisher explain only about velocity of money but he did not explain deeply about time deposit and demand deposit

Answer 3

There are many criticisms on the quantity theory. First of all there is no direct and appropriate relationship. The relationship between the quantity of money and the price level is not direct and proportionate relationship. The relationship between the quantity of money and the price level is not direct and proportionate as assumed in Fisher's theory. The second thing is the static theory. The theory assumes that the changes in supply of money do not affect V and T which are independent variables. The fact is that in the real life, these variables do not remain constant. This theory also considers the assumption of full employment. The theory is based on the assumption of full employment which is unrealistic. According to Keynes, full employment in a capitalistic economy is rare situation. The economy normally operates at less then full employment. In the quantity theory of Fisher's the influence of the rate of interest on the money supply and the level of prices has been completely ignored. The fact is that an increase or decrease in money supply has an important bearing on the rate of interest an increase in money supply leads to a decline in the rate of interest and vice versa.