Question

How does Fisher’s quantity theory of money differ from the Keynes quantity theory of money?

(Answers should be accurate, insightful, thorough, and clearly expressed. They should also demonstrate strong command of key ideas, theories, research findings, and policy debates)

Answer 1

Following are the differences between the Fisher quantity theory of money and Keynes quantity theory of money:

Fisher simply states that there is a direct and proportional relationship between the money supply and price level. An increase in the money supply causes a rise in the price level.

MV =PY

There is no change in V and Y.

Thus the change in M produces a direct impact on the P. Output does not change.

Keynes has reformulated the quantity theory of money. Keynes does not see direct relationship between the money supply and price level. Thus, When money supply increases, the interest rate declines. Decline in the interest rate drive up the investment expenditure. Rise in the expenditure leads to rise in the aggregate demand and output.

Eventually, output rise. Unlike the Fisher version of quantity theory of money, keynes strongly believes that money supply increase will drive up the output level and employments would be generated.