In the contemporary world, Friedman’s quantity theory idea has become a very controversial issue. Some economists are very much impressed by his vigorous presentation of the theory, while many do not concur with the Chicago version.

The main criticisms levelled against Friedman’s analysis are:

1. As Wrightsman observes, Friedman’s definition of money is broad which includes time deposits along with the demand deposits and currency.

This broad definition of money adopted by Friedman has led him to underestimation of the effect of interest rates on the demand for money. Since, time deposit is an interest-earning asset.

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While currency and demand deposits are non-interest bearing assets, when interest rate in general increases, including that of time deposit rates, the demand for currency and demand deposits falls, but that for time deposits rises.

Now, when the increase in time deposits is combined with the decrease in currency and demand deposits are combined with the decrease in currency and demand deposits, the product is obviously smaller than the decrease in currency and demand deposits taken alone.

And because of only this that Friedman considered interest rate to be a less significant factor in determining the money demand. But, using conventional criterion of money which excludes the time deposits, it has been empirically proved that the rate of interest has a major effect on the demand for money.

2. Critics have doubted very much as to Friedman’s explanation of the transmission of monetary change to the real economic change. It is unlikely that though interest rates and other rates of return encourage so much substitution among non-monetary assets, yet they do not affect the holding of cash balances.

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Critics further point out that an increase in the money supply causes lower rate of interest, which in effect causes holding of more cash balances, thereby to restore the monetary equilibrium and not through an appreciable rise in the price level and real income as assumed by Friedman.

3. It cannot be said historically that the money supply is generally independent of changes in price and income level as assumed by Friedman. To critics, the money supply may be as much as price and income determined as is determining.

Nonetheless, there is also some truth in stressing that some rise in the price level is always attributed to art increase in money supply, though there may not be an exact corresponding relationship. To that extent, one has to accept at least partially the gist of the quantity theory whether it is Fisherian, Pigouian or Chicagoist.

Friedman, as such, deserves credit for a rigorous presentation of the theory which has drawn world-wide attention in most scientific and progressive contemporary era.