Is Friedman's quantity theory of money close to Classical or Keynesian approach to the aggregate demand for money? Give justifications for your arguments.

Friedman’s Quantity Theory of Money: A Restatement of Classical Principles

Friedman’s QTM, developed in his *A Monetary History of the United States* (1963), refined the classical approach by emphasizing the stability of the velocity of money (V) in the long run. He argued that while V might fluctuate in the short run, it tends to be relatively stable, making changes in the money supply (M) the primary driver of changes in the price level (P). This aligns closely with the Classical dichotomy, which separates real and nominal variables, asserting that monetary changes only affect nominal variables like prices.

Classical Approach to Aggregate Demand for Money

The Classical school, exemplified by economists like David Ricardo and John Stuart Mill, viewed money as a ‘veil’ over the real economy. Their demand for money function was primarily based on the **transactions motive** – people hold money to facilitate everyday transactions. This demand is directly proportional to the level of income (T). Crucially, Classical economists believed that changes in the money supply would only lead to proportional changes in prices, leaving real output unchanged. This is the principle of **monetary neutrality**.

Keynesian Approach to Aggregate Demand for Money

John Maynard Keynes, in his *The General Theory of Employment, Interest and Money* (1936), challenged the Classical view. He introduced two additional motives for holding money: the **precautionary motive** (holding money for unforeseen expenses) and the **speculative motive** (holding money to profit from anticipated changes in interest rates). The speculative demand, in particular, made the demand for money sensitive to interest rates – an inverse relationship. This meant that monetary policy could influence aggregate demand and, consequently, real output, especially in the short run. Keynesian economics emphasized the potential for **liquidity preference** to trap monetary policy, rendering it ineffective during deep recessions.

Comparing Friedman’s QTM with Classical and Keynesian Views

Friedman’s QTM, despite acknowledging short-run fluctuations in velocity, fundamentally aligns with the Classical perspective. Both emphasize the long-run dominance of real factors and the neutrality of money. Friedman’s focus on the stable velocity of money reinforces the Classical idea that changes in the money supply primarily affect prices.

Feature	Classical	Keynesian	Friedman’s QTM
Demand for Money Motives	Transactions	Transactions, Precautionary, Speculative	Primarily Transactions, with short-run deviations
Money-Output Relationship (Long Run)	Neutral	Non-Neutral	Neutral
Velocity of Money	Stable	Unstable	Relatively Stable (Long Run)
Role of Monetary Policy	Limited	Significant (Short Run)	Significant, but primarily affects prices (Long Run)

While Friedman acknowledged short-run complexities, his emphasis on controlling the money supply to maintain price stability reflects a Classical belief in the power of monetary forces. He differed from strict Classical economists by recognizing the potential for short-run deviations from neutrality, but his overall framework remained rooted in the long-run Classical tradition. The Keynesian view, with its emphasis on sticky prices and the speculative demand for money, presents a significantly different perspective, highlighting the potential for monetary policy to influence real economic activity.