CHAPTER 2
Transaction Theory of Demand for Money
The Transaction Theory
In Chapter 1, we pointed out that the output of the economy, Q in the equation of exchange, is a function of technology and factors of production, namely, labor and capital. Therefore, in the discussion of the relationship between money and prices, output and velocity were considered to be constant. This functional relationship for output does not preclude the possibility of recession. Because during a recession, the economy is not at full employment, Q would be at a level below the full-employment output. The requirement of full employment, which is more plausible in the long run than in the short run, is implicit in the quantity theory of demand for money. The change in ...
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