How Does Money Supply Affect Interest Rates Today

Please help improve it or discuss these issues on the talk page. Some of this article’s listed sources may not be reliable. Please help this article by looking for better, more reliable sources. Unreliable citations may be challenged or how Does Money Supply Affect Interest Rates. This article relies too much on references to primary sources. The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics.

Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level. Henry Thornton introduced the idea of a central bank after the financial panic of 1793, although, the concept of a modern central bank was not given much importance until Keynes published “A Tract on Monetary Reform” in 1923. Karl Marx modified it by arguing that the labor theory of value requires that prices, under equilibrium conditions, are determined by socially necessary labor time needed to produce the commodity and that quantity of money was a function of the quantity of commodities, the prices of commodities, and the velocity. The law, that the quantity of the circulating medium is determined by the sum of the prices of the commodities circulating, and the average velocity of currency may also be stated as follows: given the sum of the values of commodities, and the average rapidity of their metamorphoses, the quantity of precious metal current as money depends on the value of that precious metal. Its correspondence with fact is not open to question. Also like Marx he believed that the theory was misrepresented. Where Marx argues that the amount of money in circulation is determined by the quantity of goods times the prices of goods Keynes argued the amount of money was determined by the purchasing power or aggregate demand.

Thus the number of notes which the public ordinarily have on hand is determined by the purchasing power which it suits them to hold or to carry about, and by nothing else. The error often made by careless adherents of the Quantity Theory, which may partly explain why it is not universally accepted is as follows. Now “in the long run” this is probably true. If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k’ would be entirely unaffected. But this long run is a misleading guide to current affairs. In actual experience, a change in n is liable to have a reaction both on k and k’ and on r.

It will be enough to give a few typical instances. State Banks towards their gold reserves. These reserves were kept for show rather than for use, and their amount was not the result of close reasoning. Thus in these and other ways the terms of our equation tend in their movements to favor the stability of p, and there is a certain friction which prevents a moderate change in v from exercising its full proportionate effect on p. On the other hand, a large change in n, which rubs away the initial frictions, and especially a change in n due to causes which set up a general expectation of a further change in the same direction, may produce a more than proportionate effect on p.

Keynes thus accepts the Quantity Theory as accurate over the long-term but not over the short term. Keynes remarks that contrary to contemporaneous thinking, velocity and output were not stable but highly variable and as such, the quantity of money was of little importance in driving prices. The theory was influentially restated by Milton Friedman in response to the work of John Maynard Keynes and Keynesianism. A counter-revolution, whether in politics or in science, never restores the initial situation. It always produces a situation that has some similarity to the initial one but is also strongly influenced by the intervening revolution. That is certainly true of monetarism which has benefited much from Keynes’s work.

How Does Money Supply Affect Interest Rates

Keynes’ Theory of Money interest His Attack on the Classical Model”; velocity would decline. First published how does Institute of Economic Affairs, edited by M. Ludwig money Mises agreed that rates was a core rates truth in the quantity theory – keynes remarks that contrary to contemporaneous thinking, affect the simplest way how me to suggest why this was relevant is to recall that an essential element supply the Interest doctrine was the passivity money velocity. But updated and supply by the monetarist school of economics. In new classical macroeconomics the quantity theory of money does still a doctrine of fundamental importance, alternative theories include the real bills doctrine and the more affect fiscal theory of the price level.