CH. 15

INCENTIVES TO LIQUIDITY 209

always be zero in equilibrium. Hence in equilibriumM 2 = o and M = M x ; so that any change in M willcause the rate of interest to fluctuate until incomereaches a level at which the change in M , is equal tothe supposed change in M. Now MiV = Y, where

V is the income-velocity of money as defined above and

V is the aggregate income. Thus if it is practicableto measure the quantity, O, and the price, P, of currentoutput, we have Y = OP, and, therefore, MV = OP;which is much the same as the Quantity Theory ofMoney in its traditional form . 1

For the purposes of the real world it is a great faultin the Quantity Theory that it does not distinguishbetween changes in prices which are a function ofchanges in output, and those which are a function ofchanges in the wage-unit . 2 The explanation of thisomission is, perhaps, to be found in the assumptionsthat there is no propensity to hoard and that there isalways full employment. For in this case, O beingconstant and M 2 being zero, it follows, if we can take

V also as constant, that both the wage-unit and theprice-level will be directly proportional to the quantityof money.

1 If we had defined V, not as equal to Y/M, but as equal to Y/M , then,of course, the Quantity Theory is a truism which holds in all circumstances,though without significance.

2 This point will be further developed in Chapter 21 below.