Quanitity Theory of Money, Wicksell Term Paper

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In the long run, the volatility of money supply will also only cause changes in inflation rate and thus the nominal GDP of the country, as believed by monetarists, as the markets are believed to be always approaching their full employment rate.

But with evolution of capital markets and appearance of numerous wealth capitalization methods besides holding M1, the velocity of money became very variable rather than stable and equal to one, which made scholars hesitate on the validity of Quantity Theory of Money, while equation of exchange is supported by majority of economics schools.

Besides many contributions made by Knut Wicksell into the economic theory, the major appreciated work is the interest theory implications from his work Interest and Prices, where he separated the notion of monetary interest rate, or interest rate derived from the capital markets; and the natural interest rate, or the interest rate neutral to the prices in the real markets and which equates the supply and demand in the real market, resting on the assumption that the capital markets are not necessary.

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Developing this theoretic background, Austrian economists have suggested that economic growth begins when the natural interest rate exceeds the one observed in the capital markets, this theory referred to as the theory of business cycles. The findings of Wicksell had also big effect on further Keynes "The General Theory of Employment, Interest, and Money.".....

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