Chapter 32: The quantity theory of money
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This study informs about the complex and time-varying relationship between John Maynard Keynes and the Cambridge approach to the quantity theory of money. Since it shows Keynes as a quantity theorist, the most comprehensive discussions are devoted to his Tract on Monetary Reform, the first milestone in Keynes’s oeuvre as a monetary economist, published in 1923. I introduce Keynes’s exposition of the quantity theory, extended to include a fractional reserve system of commercial banking, and how he used it as an engine of short-run monetary analysis. Subsequently, I account for Keynes’s first escape from what he called the “law of unit elasticity” in his path-breaking study of the dynamics of hyperinflation. Then, it is shown how Keynes’s liquidity preference theory initiated the demise of one-equation macroeconomics in favour of general equilibrium models.

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