Macroeconomics: Theory and Policy

20

Theories of inflation

After studying this topic, you should be able to understand

• The proponents of the monetarist approach take the quantity theory of money as their basis and propose that the changes in the price level can be explained mainly in terms of the changes in the supply of money.
• According to Fisher’s approach, change in the supply of money leads to proportional changes in the general price level.
• If Cambridge cash balance approach is emphasized as a theory of price, then P is determined from the quantity theory of money equation
• The modern theory is an attempt by Friedman to present the quantity theory of money as a theory of ...