between price level and output was explained by the quantity theory of money; David Hume had presented such a theory in his 1752 work Of Money (Essays Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting Modern macroeconomics can be said to have begun with Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936. Keynes expanded on the concept of liquidity preferences and built a general theory of how the economy worked. Keynes's theory brought together both monetary and real economic factors for the first time, explained unemployment, and suggested policy achieving economic stability. Keynes contended that economic output is positively correlated with money velocity. He explained the relationship via changing liquidity preferences: people increase their money holdings during times of economic difficulty by reducing their spending, which further slows the economy. This paradox of thrift claimed that individual attempts to survive a downturn only worsen it. When the demand for money increases, money velocity slows. A slowdown in economic activities means markets might not clear, leaving excess goods to waste and capacity to idle. Turning the quantity theory on its head, Keynes argued that market changes shift quantities rather than prices. Keynes replaced the assumption of stable velocity with one of a fixed price-level. If spending falls and prices do not, the surplus of goods reduces the need for workers and increases unemployment. Classical economists had difficulty explaining involuntary unemployment and recessions because they applied Say's law to the labor market and expected that all those willing to work at the prevailing wage would be employed. In Keynes's model, employment and output are driven by aggregate demand, the sum of consumption and investment. Since consumption remains stable, most fluctuations in aggregate demand stem from investment, which is driven by many factors including expectations, "animal spirits", and interest rates. Keynes argued that fiscal policy could compensate for this volatility. During downturns, governments could increase spending to purchase excess goods and employ idle labor. Moreover, a multiplier effect increases the effect of this direct spending since newly employed workers would spend their income, which would percolate through the economy, while firms would invest to…

where M is the money supply, V is the velocity of money, and PY is the nominal value of output or nominal GDP (P itself being a price index and Y the amount The quantity theory of money (QTM) is a hypothesis within monetary economics which states that the general price level of goods and services is directly proportional to the amount of money in circulation (i.e., the money supply), and that the causality runs from money to prices. This implies that the theory potentially explains inflation. It originated in the 16th century and has been proclaimed t Q …