Money, Income, and Causality: Some Evidence from Pakistan

Muhammad Hussain

Abstract


The role of money in determining the level of economic
activity has long been debated among economists. The classical
economists were of the view that the changes in the money supply can
only affect the monetary variables like the price level and nominal wage
rates but cannot influence real output. J. M. Keynes and his followers
asserted that changes in money supply do influence the level of real
output through their effect on the rate of interest and thereby changing
investment expenditure. However, by introducing the idea of a liquidity
trap and by making investment as highly interest inelastic, Keynes did
not assign any active role to money. Milton Friedman and his followers,
known as the Monetarists, raised the slogan that "money does matter" and
thus tried to assign a dominant role to money supply in determining the
level of economic activity. They assert that changes in money supply
have a dominant influence on changes in nominal income. They are of the
view that in the short run money does influence real output and
employment and thus money is the dominant factor causing cyclical
movements in output and employment. However, they believe like the
classical economists, that in the long run the changes in money
primarily influence the price level and other nominal
magnitudes.

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DOI: https://doi.org/10.30541/v30i4IIpp.907-918

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