Online course on the Real Incomes Approach to Economics

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Statement two

M can increase to high levels which can result in general price rises in goods and services, or inflation


On the question of "excess" M generating inflation, monetarists, such as Milton Friedman, who held this opinion, were unable to explain the mechanism whereby money volumes generate inflation because in a competitive economy prices are set by companies who have no reason to raise prices since this results in loss of market share2. The QTM identity indicates that a rise in money (M) would result in a rise in prices of goods and services (P) while not providing any determinant functions that generate such as result.


2  McNeill, H. W., "Monetarism & The Cost of Living, British Strategic Review, 2022.