Scribd
Upload
9 views16 pages

3 12 2024

The document discusses the Cambridge version of the Quantity Theory of Money, which posits that money serves as both a store of wealth and a medium of exchange, with demand for money being proportional to income. It contrasts this with Fisher's version and introduces Keynes's Liquidity Preference Theory, which includes transaction, precautionary, and speculative motives for holding money. The document also provides a mathematical example to illustrate the calculation of interest rates based on money demand and supply.

Uploaded by

Zunnuraini Aliyu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
9 views16 pages

3 12 2024

The document discusses the Cambridge version of the Quantity Theory of Money, which posits that money serves as both a store of wealth and a medium of exchange, with demand for money being proportional to income. It contrasts this with Fisher's version and introduces Keynes's Liquidity Preference Theory, which includes transaction, precautionary, and speculative motives for holding money. The document also provides a mathematical example to illustrate the calculation of interest rates based on money demand and supply.

Uploaded by

Zunnuraini Aliyu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 16

3 12 2024

Follow
Theories of Money Demand
Cambridge Version of the
Quantity Theory of Money
(Cash balance version)
Explanation to the Theory:
This alternative to Fisher’s version of quantity
theory, was presented and developed by a group
of Cambridge economists like: Pigou, Marshall,
Robertson, Cannen, and Hartle, in the early
1900s, where they explained the
theory in a new way.
These Cambridge economists
argue that: money acts both as:
▪ a store of wealth, and:
▪ a medium of exchange.
According to Cambridge economists:
▪ people wish to hold cash to finance
transactions and:
▪ for security against unforeseen needs.
They also suggested that:
an individual’s demand for cash or
money balances
is proportional to his income
Clearly: larger the incomes of the
individual,
greater is the demand for cash
If Fisher’s ideology is very
popular in America,
there is more recognition for
Cambridge ideology
in European countries.
The Cambridge economists,
attempted to establish that:
the Quantity Theory of Money
is
a theory of demand for money
(or liquidity preference).
Formally, the Cambridge equation is identical with
the income version of Fisher’s equation:
the demand for money would be proportional to income.

MV = PT 𝑷𝑻
𝑴=
𝑽 𝟏
𝑴 = ∗ 𝑷𝑻
𝑽 Md = k PY
M = MS=Md At Equilibrium
Where: k = 1/V in the Fisher’s equation.
Md =Demand for money
Y = Real national income
P = Aggregate price level of currently
produced goods and services
PY = Nominal Income
k = Proportion of nominal income
that people want to hold as cash balances
Here: 1/V = M/PT measures the
amount of money required per unit of
transactions.
And: its inverse V measures the
rate of turnover or each unit of money
per period.
The main features of Cambridge’s Quantity
Theory are as follows:
(1)A Part of Income is kept in the Liquid Form
(2) The Demand of Money Depends on the
Liquidity Preferences:
(3) Demand of Money is Influenced by
Many Factors:
(i)The Period of Obtaining Income:
(ii) Distribution of National Income:
(iii) The Velocity of Circulation of Money:
(iv) Population:
(v) Trade Cycle:
Keynes’s Liquidity Preference Theory
Keynes does not agree with the older quantity theory
Keynes reformulated quantity theory of money
Keynesian demand for money has 3 components:
➢Transaction motive: Positively related to income
➢Precautionary motive:Positively related to income and:

➢The Speculative motive: Negatively related to interest rate


Keynes made the demand for money
a function of 2 variables; namely:
▪money income; and:
▪rate of interest, r.
In functional form:
For Keynes, the total demand for money implies:
total cash balances and: total cash balance
may be classified into two categories:
(a) active cash balances consisting of :
➢transactions demand for money, related to Y
➢ precautionary demand for money related to Y, L 1
(b) idle cash balances-consisting of:
➢ speculative demand for money, negatively related to r. L2

Md = L1 + L2 ഥ
MS = 𝑴 Md = MS
Example
If L1 = 30+0.4Y , L2 = 20 – 300 r
Find Interest rate in the following cases:
1. Ms = 660 , Y=1660
2. Ms = 660 , Y= 1675
3. Ms = 660 , Y= 1562.5
4. Ms = 700 , Y= 1660
5.Ms = 645 , Y= 1660
6.Ms = 714 , Y= 1660
Solution
If L1 = 30+0.4Y , L2 = 20 – 300 r
1. Ms = 660 , Y=1660
Equilibrium at: Md = MS
Md = L1 + L2
Md = 30+0.4Y + 20 – 300 r
Md = 30+0.4 (1660) + 20 – 300 r
Md = 30+ 664 + 20 – 300 r
Md = 714 – 300 r MS= 660
Md = 714 – 300 r MS= 660
714 – 300 r = 660
714 – 660 = 300 r
54 = 300 r
r = 54 ÷ 300 = 0.18 18 %

You might also like