Chapter 6 complete

Serial 
Number 
Traditional Quantity Theory of 
Money 
Milton Friedman’ Modern Quantity 
Theory of Money 
1. 
This theory is based on the medium 
of exchange function of money. 
This theory is based on both medium of 
exchange and wealth. 
2. 
This theory does not discuss the 
monetary transmission mechanism 
that is the process whereby monetary 
influences are transmitted to other 
sectors of the economy, particularly 
the commodity market. It is this lack 
of 
explanation 
of 
transmission 
mechanism 
makes 
this 
theory 
mechanical.
This theory discusses the monetary 
transmission mechanism that is the process 
whereby 
monetary 
influences 
are 
transmitted to other sectors of the 
economy, particularly the commodity 
market. It is this lack of explanation of 
transmission mechanism makes this theory 
mechanical. 
3. 
Traditional QTM has restricted to 
money. 
Modern QTM has widened the range of 
substitution between money and non-
money assets, not restricting the latter to 
the financial assets, but including real 
physical goods as well. 
4. 
Discrepancy between actual and 
desired stock of money (that is about 
transmission mechanism) can be 
corrected in either of the two ways: 
(i) by a rearrangement of assets and 
liabilities through purchase, sale, 
borrowings and lendings, and (ii) by 
the use of current flows of income 
and expenditure to add to or subtract 
Modern 
quantity 
theory 
of 
money 
considered 
both 
ways 
to 
correct 
discrepancy between actual and desired 
stock of money. 

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from some assets and liabilities. The 
keynesian 
liquidity 
preference 
analysis stressed the first, and in its 
most rigid form, one specific 
rearrangement: that between money 
and bonds. The earlier quantity 
theory of money stressed the second 
to the almost complete exclusion of 
the first.