Online course on the Real Incomes Approach to Economics

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Concluding

The reliance of such identities as the QTM to explain monetary policy can be seen to be a misrepresentation of the mechanisms at work in the economy because a large number of variables, representing assets, savings and oveseas monetary flows are not accounted for. The addtional "objects" and processes bind a good deal of money into a non-circulating state thereby reducing the cash flow of transactions in goods and service production and consumption.

Because neither the QTM or the RMT contain any determinant functions that can calculate the prices of goods and services it is apparent that this assumption was always a fallacy.

This fallacy continued for well over two centuries and over the last century in relation to the Fisher version of the QTM.

It is apparent looking at the extended RMT, and accepting that the prices of goods and service are set independently by companies, and who will, normally, only raise prices in response to rises in input costs, that the three statements:
  1. By injecting more money (M) into the economy, demand is raised leading to more economic growth.

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

  3. That by restricting M through raised interest rates or taxation, inflation will decline and the economy will return to a "natural equilibrium"

Have no logical foundation because any price changes in goods and services are not in response to changes in money volumes but rather to the partition and in the directions of the separate cash flows into assets, savings, offshore activities and onshore supply side production of goods and services.

This slide sequence should have served to demonstrate that the QTM is devoid of any utility for lack of representation of reality and it needs to be removed from the unjustified dominance it has enjoyed for close to three centuries as a central tenet of monetarism. It should be apparent that the decline and fall of the QTM heralds the decline and fall of monetarism in its current form.