Modern Quantity Theory of Money

Modern Money Theory

Modern Money Theory, also referred as ‘MMT’, is a school of economic thought that focuses on understanding the ways money is created and used in the modern macroeconomy. The theory explains the relationship between government, central banks, commercial banks, and people within the economy. Modern Money Theory provides insight into the proper use of fiscal and monetary policies, which can help countries achieve economic growth, stability, and prosperity.

At the core of MMT is the belief that the government should be the “employer of last resort”, meaning that when private sector employment has decreased and real economic activity is curtailed, it is the role of the government to fill in the void. This means that in recessionary periods, the government should increase its spending to stimulate job growth and get people buying again. Modern Money Theory also postulates that money has a dual nature, being a policy medium and a store of value. This then leads to a conclusion that the government can and should use fiscal policy (in the form of taxation and/or government spending) to manage the macroeconomy and increase economic growth, stability and prosperity.

MMT is based on a few key tenets. One is that governments should ensure full employment and foster economic growth through fiscal policy - by increasing or decreasing spending and/or increasing or decreasing taxes. A second tenant of MMT is that governments should use the central bank as a tool to increase or decrease the money supply and influence interest rates. This is done to ensure financial stability, and to maintain control over the domestic and external value of the currency. Finally, MMT also argues that government should run budget deficits (by spending more than it collects in taxes) during times of high unemployment, and budget surpluses during times of full employment.

Modern Money Theory has emerged as a prominent school of thought over the past decade. It has been employed to explain the effects of government policies on a variety of macroeconomic issues, such as inflation, unemployment, and economic growth. The theory has been utilized by a number of leading economists and policy makers in recent years, including former U.S. Federal Reserve Chairman Ben Bernanke, who seemed to employ the insight that MMT provides in the aftermath of the 2008 economic crisis.

At heart, MMT is an exploration into how fiscal and monetary policies should be employed to foster economic growth. By understanding and using the relationship between government, central banks, commercial banks, and individuals within the economy, MMT provides governments with the tools to better manage the macroeconomy, help increase stability and support economic growth.

Modern quantity theory of money is an economic theory which states that the overall price level of goods and services are determined by the supply and demand of money in an economy. This theory is based on the quantity equation of money, which states that the money supply multiplied by the velocity of money is equal to the average price level multiplied by the total transaction volume.

Modern quantity theory of money explains how changes in the money supply affect the price level in an economy. When more money is printed, the money supply increases and as a result, prices increase and inflation occurs. On the other hand, when there is a decrease in the money supply, prices contract, and deflationary pressure occurs in the economy.

The modern quantity theory of money is closely linked to the classical theory of macroeconomics and is used to study the effects of monetary policies. For instance, central banks can use this theory to determine how many new notes and coins are to be printed in order to keep levels of inflation under control. Governments can also use this theory to determine how much money should be printed to boost economic growth and employment.

The modern quantity theory of money also explains why deflation can be dangerous for economies. As the money supply decreases and deflationary pressure increases, people begin to hoard money, which causes the money supply to decrease even further. This leads to high unemployment, as businesses are unable to generate enough profits to pay their workers. This can cause a vicious cycle of deflation and economic contraction.